Board Structure and Price Informativeness

We develop and test the hypothesis that private information incorporated into stock prices affects the structure of corporate boards. Stock price informativeness may be a complement to board monitoring, because the information revealed by prices can be used by directors to monitor management. But price informativeness may also be a substitute for board monitoring, because more informative prices can trigger external monitoring mechanisms, such as takeovers. We find robust evidence for the substitution effect: Stock price informativeness, as measured by the probability of informed trading (PIN), is negatively related to board independence. Consistent with the model's predictions, this relationship is particularly strong for firms exposed to external governance mechanisms and internal governance mechanisms, and firms for which firm-specific knowledge is relatively unimportant. We address endogeneity concerns in a number of different ways and conclude that our results are unlikely to be driven by omitted variables or reverse causality. The results are also robust to using different measures of price informativeness and different proxies for board monitoringCorporate boards, Independent directors, Price informativeness

CEO compensation, change, and corporate strategy

CEO compensation can influence the kinds of strategies that firms adopt. We argue that performance-related compensation creates an incentive to look for overly ambitious, hard to implement strategies. At a cost, shareholders can curb this tendency by precommitting to a regime of CEO overcompensation in highly changeable environments. Alternatively shareholders can commit to low CEO pay, although this requires a commitment mechanism (either by the board of the individual company, or by the society as a whole) to counter the incentive to renegotiate upwards. We study the conditions under which the different policies for CEO compensation are preferred by shareholders.info:eu-repo/semantics/publishedVersio

Signalling with dividends? : The signalling effects of dividend change announcements: new evidence from Europe

The dividend policy is one of the most debated topics in the finance literature. One of the different lines of research on this issue is based on the information content of dividends, which has motivated a significant amount of theoretical and empirical research. According to the dividend signalling hypothesis, dividend change announcements trigger share returns because they convey information about management’s assessment on firms’ future prospects. We start by analysing the classical assumptions of dividend signalling hypothesis. The evidence gives no support for a positive relation between dividend change announcements and the market reaction for French firms, and only a weak support for the Portuguese and the UK firms. After accounting for non-linearity in the mean reversion process, the global results do not give support to the assumption that dividend change announcements are positively related with future earnings changes. Afterwards, we formulate two hypotheses in order to explore the window dressing phenomenon and the maturity hypothesis, finding some evidence, especially in the UK market, for both of the phenomenon.info:eu-repo/semantics/publishedVersio

Signalling with dividends? new evidence from Europe

According to the dividend signalling hypothesis, dividend change announcements trigger share returns because they convey information about management’s assessment on firms’ future prospects. We analyse the classical assumptions of the dividend signalling hypothesis, using data from three European countries. The evidence gives no support to a positive relation between dividend change announcements and the market reaction for French firms, and only weak support for the Portuguese and UK firms. After accounting for non-linearity in the mean reversion process, the global results do not give support to the assumption that dividend change announcements are positively related with future earnings changes. We also formulate two hypotheses in order to explore the window dressing phenomenon and the maturity hypothesis, finding some evidence in favour of both, especially in the UK market

Lower propensity to pay dividends? new evidence from Europe

Recently, some empirical studies reported the phenomenon of the low propensity of firms to dividend payment, concluding that companies have become less likely to pay dividends. In addition, the major parts of these studies sustain the investors’ expectations regarding dividend payments also decreased. We analyse the propensity to pay dividends in three European markets: Portugal, France and the UK. Although they are all European markets, they are different from each other for several reasons. Firstly, the UK is one of the most important European capital markets, whereas the French and Portuguese markets are smaller, specially Portugal, that is a very small market compared to other Western European markets. Additionally, these two markets are less intensively researched. Secondly, we have differences in these countries associated with the ownership of equity. In Portugal and France ownership tends to be more concentrated than in the UK. Thirdly, Portugal and France are bank-based system, whereas the UK is a market-based system. Finally, the legal rules covering protection of corporate shareholders is different in the three countries. While the UK is a country of Anglo-Saxon influence, the other two countries are characterised by a continental influence. We find evidence of the decline of firms paying dividends, except for the French market. Moreover, we find evidence suggesting that the Portuguese market does not have such a smoothing dividend policy like the US or the UK markets, but it has a more volatile dividend policy, such as the case of the German market

The phenomenon of the adverse market reaction to dividend change announcements: new Eeidence from Europe

The dividend policy is one of the most debated topics in the finance literature. According to the dividend signalling hypothesis, which has motivated a significant amount of theoretical and empirical research, dividend change announcements trigger share returns because they convey information about management’s assessment on firms’ future prospects. Consequently, a dividend increase (decrease) should be followed by an improvement (reduction) in a firm’s value. Although there are empirical evidence supporting the positive relationship between dividend change announcements and the subsequent share price reactions, some studies have not supported this idea. Furthermore, several studies found evidence of a significant percentage of cases where share prices reactions are opposite to the dividend changes direction, like the works of Asquith and Mullins (1983), Benesh, Keown and Pinkerton (1984), Born, Mozer and Officer (1988), Dhillon and Johnson (1994) Healy, Hathorn and Kirch (1997), and, more recently, Vieira (2005). We introduce a new approach to investigate the relationship between the market reaction to dividend changes and future earnings changes with the purpose of understanding why the market sometimes reacts negatively (positively) to dividend increases (decreases). We find only weak evidence for the dividend information content hypothesis. The Portuguese results suggest that the adverse market reaction to dividendchange announcements is basically due to the fact that the market does not understand the signal given by firms though dividend change announcements. Moreover, we find no evidence of the inverse signalling effect, except for the UK market. The results suggest that the UK market investors have more capability to predict future earnings than the investors of the Portuguese and the French markets

The effect of firm-specific factors on the market reaction to dividend change announcements: new evidence from Europe

The dividend policy is one of the most debated topics in the finance literature. According to the dividend signalling hypothesis, which has motivated a significant amount of theoretical and empirical research, dividend change announcements trigger share returns because they convey information about management’s assessment on firms’ future prospects. Consequently, a dividend increase (decrease) should be followed by an improvement (reduction) in a firm’s value. However, some studies have not supported the hypothesis of a positive relationship between dividend change announcements, and the subsequent share price reaction, such as the ones of Lang and Litzenberger (1989), Benartzi, Michaely and Thaler (1997), Chen, Firth and Gao (2002), Abeyratna and Power (2002) and Vieira (2005). Furthermore, some authors found evidence of a significant percentage of cases where share prices reactions are opposite to the dividend changes direction, like the works of Asquith and Mullins (1983), Benesh, Keown and Pinkerton (1984), Born, Mozer and Officer (1988), Dhillon and Johnson (1994) Healy, Hathorn and Kirch (1997), and, more recently, Vieira (2005). Consequently, we try to identify firm-specific factors that contribute in explaining the adverse market reaction to dividend change announcements. Globally, our evidence suggests that only for the UK sample we have firm-specific factors influencing the market reaction to dividend change announcements. We conclude that the UK firms with a negative market reaction to dividend increase announcements have, on average, higher size, lower earnings growth rate and lower debt to equity ratios

Active agents, passive principals: the role of the chief executive in corporate strategy formulation and implementation

In this paper we use agency theory to study the active role of the chief executive in the formulation of corporate strategy. Unlike traditional applications of agency theory, we allow the aggent (CEO) to play a role in defining the parameters of the agency problem. We argue that CEOs willhave oncentive to propose difficult, ambigious strategies for the corporations. The effect arises becuase in equillibium, the agent may be overcompensated in the sense that the participation constraint is not binding in determining his compensation. The agent can exploit this by proposing ambitious corporate strategies, thereby influencing the parameters of the constraints in the agency problem. The principal (the owners of the company) can mitigate this by precommitting to pay high compensation regardless of the manager's chosen strategy, but may optimally perfer not to do soinfo:eu-repo/semantics/publishedVersio

CEO Compensation, Change, and Corporate Strategy

CEO compensation can influence the kinds of strategies that firms adopt. We argue that performance-related compensation creates an incentive to look for overly ambitious, hard to implement strategies. At a cost, shareholders can curb this tendency by precommitting to a regime of CEO overcompensation in highly changeable environments. Alternatively shareholders can commit to low CEO pay, although this requires a commitment mechanism (either by the board of the individual company, or by the society as a whole) to counter the incentive to renegotiate upwards. We study the conditions under which the different policies for CEO compensation are preferred by shareholders. Copyright 2005 by The American Finance Association.