'Hedge Funds: Stock Pickers or Managers?

For decades, corporate managers have criticised analysts, fund managers, hedge fund managers and private equity professionals for telling them how to run their business, wihout having had the necessary experience. Now hedge fund activists are regularly suggesting operational decisions, and in some cases even in areas traditionally reserved for management. ‘Activism has gone from being frowned upon, something that marks you out as a rogue or maverick, to almost socially responsible.’1 These hedge funds may have become an accepted part of the governance universe but are they actually adding value? Recent studies have answered this question in the affirmative, but what if those companies picked out by hedge funds for their attention were already on their way to outperformance? The observed outperformance may not be due to a hedge fund’s ability to contribute to value creation but a mere reflection of their stock picking abilities. The difficulty is in identifying those companies that would have made typical hedge fund targets but which were not actually targeted, i.e. build an appropriate group of comparable companies. We have developed a statistical model to identify just these companies

Allocative Efficiency of Internal Capital Markets: Evidence from Equity Carve-outs by Diversified Firms

We examine whether equity carve-outs (ECOs) lead to improvements in the functioning of the internal capital markets (ICM) of diversified firms. Divestments, including spin-offs, sell-offs and ECOs, can be employed by firms to improve allocative efficiency. Equity carve-outs, unlike spin-offs and sell-offs, leave the parent’s ICM intact but provide the opportunity to enhance internal and external corporate governance mechanisms. Using a US sample of 354 ECOs completed between 1980 and 2013, we find that the allocative efficiency of parents is augmented significantly following ECOs. This increase in allocative efficiency is driven by improvements in the governance characteristics of parent companies

Impact of US derivatives accounting policy (SFAS 133) on income smoothing choices and disclosure of derivatives related information

This study is on the effects of United States (US) Statement of Financial Accounting Standards number 133 (SFAS 133), Accounting for Derivatives Instruments and Hedging Activities, which was introduced in 2001. The first area of investigation focuses on the impact of SFAS 133 on income smoothing through the application of derivatives and discretionary accruals. The second key aspect is how SFAS 133 influences the disclosure of derivatives related information. Addressing these two issues together, provides an integrated understanding of how accounting policy can affect both risk management and risk disclosure choices. The study comprises a detailed literature review of extant empirical and analytical studies. It primarily extends the work of studies that initially looked at derivatives and discretionary accruals as income smoothing substitutes, such as Barton (2001) and Rajgopal and Pincus (2002). The theoretical framework developed during the literature review, discusses the genesis and key features of SFAS 133, and the determinants of the two key income smoothing choices of derivatives use and discretionary accruals. These include capital markets, managerial risk and corporate governance determinants. In addition, the theoretical framework outlines how SFAS 133 fair value recognition requirements can influence disclosure of related information through the footnotes. It presents the argument that the extent to which notes are complementary to recognition and measurement requirements should outweigh the extent to which they may be considered substitutes. It further describes the literature on disclosure incentives, including capital markets, proprietary cost concerns, managerial talent, managerial risk incentives based on compensation and litigation cost. This is as a precursor to the univariate and multivariate empirical testing of 1999 to 2003 data from 253 US firms (i.e. 850 firm-year observations). In conducting the empirical testing, I endeavour to address the problems of model endogeneity that could arise due to derivatives use and discretionary accruals being determined jointly. I also address the individual effects that arise due to the application of panel data. A key empirical finding is that after adopting SFAS 133, corporate managers increase discretionary accruals. However, there is no conclusive multivariate evidence of SFAS 133 reducing derivatives use, as hypothesized. An additional finding is that there is a substitution relationship between derivatives use and discretionary accruals. However, I also find that SFAS 133 adoption weakens the extent to which accruals influences derivatives use, but not the other way round. This latter finding suggests a partial substitution relationship exists after SFAS 133 and lends itself to a number of plausible explanations. These include accruals being complements rather than substitutes to derivatives use, after SFAS 133. SFAS 133 could trigger either increased earnings volatility or the greater use of speculative derivatives. Either of these could then induce the increased use of accruals in a manner that confounds the income smoothing substitution relationship. Despite the substitution relationship, the use of derivatives to smooth income is more akin to economic reality, as derivatives use also influences cash flow and fundamental economic volatility. Thus the finding that managers increase their use of accruals in general, after SFAS 133, suggests that SFAS 133 adoption, results in choices that are less beneficial to shareholders. I come to this conclusion based on the empirical evidence of Huang, Deis, Zhang and Moffit (2009). Their study shows that for income smoothing purposes, derivatives enhance shareholder value to a greater extent than the use of accruals. Further to the study of its impact on income smoothing, the empirical findings of SFAS 133 on derivatives related disclosure, build a collective picture of how different reporting practices can be influenced by accounting policy. The study finds a significant positive association between SFAS 133 and derivative information disclosure index, in all the models. This suggests that the derivatives recognition and measurement requirements have encouraged the provision of greater disclosures. The results also show a significant positive association of capital markets incentives measured as the logarithm of trading volume. However, there is no evidence of association of proprietary costs. The results further show that auditor expertise and the level of derivatives use are positively associated with observed derivatives disclosure levels. In the same vein, litigation risk and discretionary accrual levels have a negative association. In sum, this study shows that SFAS 133 adoption has potentially adverse consequences on income smoothing choices, but at the same time it has positive consequences through its encouraging disclosures that lower the information asymmetry on risk exposures.EThOS - Electronic Theses Online ServiceGBUnited Kingdo

Does shareholder activism help or hinder shareholder value enhancement? : empirical evidence from the UK

Shareholder activism has increasingly become a widespread value enhancement strategy for institutional investors in the UK. However, thus far only one paper has reported a clinical study to analyse its impact on target firms (Becht et al, 2008) in contrast to numerous papers based on US data. The UK differs from the US in a number of institutional arrangements and legal framework. Hence analysis of the UK context may shed further insights into the motivation and impact of shareholder activism. Firstly, I conduct a survey of UK institutional shareholders to understand the scope and magnitude of shareholder engagement in the UK. I find evidence that UK institutional investors are increasing the level of engagement that they conduct with investee companies. Furthermore, my results suggest that investors prefer to engage with companies in private and fear this could be made more difficult if legally mandated engagement or voting disclosure is introduced. Additionally, I find evidence that UK institutional investors are wary of hedge funds as activists and do not feel that their aggressive activism is necessarily in the interests of the institutional investor‟s client‟s interests. Secondly, using a sample of 595 companies targeted by voting by institutional investors abstaining or voting against resolutions at AGM or EGMs, 172 companies targeted through private negotiation, and 29 companies targeted by shareholder resolutions over the period 2002 to June 2007, I attempt to analyse the impact of activist pressure on a large sample of targeted firms in the UK. I find evidence that targeted firms out-perform control firms over a three day window surrounding the targeting indicating a positive stock market reaction, but under-perform over the two and three year periods following the activist‟s intervention when assessed using multi factor benchmarks. This is consistent with existing US literature. I also find limited or no change in operating performance, firm strategy, corporate governance or executive compensation at targeted firms after becoming targets of activism when compared to the matched control firms. Again, this is consistent with US research, although it contradicts findings from the UK study by Becht et al (2008). Overall we find short term enhancement from being targeted by a shareholder activist in the UK, but this value gain is not sustained over the longer term. Thus benefits of activism seem transitory. Finally, using a sample of 370 UK companies in which 39 activist hedge funds disclose substantial shareholdings; and 101 companies UK and EU that were targeted by activist hedge funds through the press over the sample period 2000 to 2007, I conduct an empirical analysis of activism by hedge funds against targeted firms. In contrast to activism by traditional institutional investors I find evidence that hedge fund activism generates significant positive abnormal returns over both the short and long term. Thus it would appear that the more aggressive tactics used by the activist hedge funds is necessary to generate significant shareholder value increases.EThOS - Electronic Theses Online ServiceGBUnited Kingdo

What drives European spinoff value effects? : impact of corporate governance, information asymmetry, and investor irrationality on firm values

The thesis explores the magnitude and determinants of spinoff value effects using robust methodologies and different theoretical perspectives. From a sample of 170 European spinoffs in the period 1987-2005, I find that spinoff announcement returns are significantly positive while the long-run shareholder value performance of postspinoff firms is insignificant when the cross-sectional return dependence problem is controlled. This is consistent with market efficiency overall in relation to spinoffs. However, this overall efficiency may conceal irrational investor behaviour towards certain types of spinoffs. Assuming investor irrationality, I examine whether investor sentiment affects spinoff wealth effects and spinoff decisions. I use four different proxies to measure investor demand for corporate focus and glamour stocks, and observe a positive association between these proxies and spinoff announcement returns. In addition, I find that offspring, born of spinoffs to cater to investor demand for glamour stocks, significantly underperform various benchmarks including the performance of less glamourous offspring. An improvement in operating efficiency of post-spinoff firms may not be realised if post-spinoff firms have weak corporate governance and agency conflicts are not mitigated. I investigate this issue by examining changes of corporate governance mechanisms around spinoffs. I observe that spinoff firms with a controlling family shareholder have higher announcement stock returns but lower post-spinoff performance than others. Moreover, controlling family shareholders generally reduce their stock ownership in post-spinoff firms, indicating that they may undertake spinoffs to reshuffle their wealth portfolios. I also find that board monitoring and takeover threats for post-spinoff firms positively affect the long-run performance of post-spinoff firms. This thesis further inspects the relationship between information asymmetry between the pre-spinoff parent and the stock market, and spinoff value effects. By employing four different information asymmetry proxies, I find no evidence that a spinoff resolves information asymmetry problems. In contrast, I document some evidence that the information asymmetry problem may be exacerbated following spinoffs when the liquidity of post-spinoff firms is decreased. Taken together, my findings suggest that managers and shareholders should assess the desirability of a spinoff more carefully and take investor irrationality into account. This is the first study that focuses on European spinoffs over a long period and tests various theories concerning the sources of value. It also provides the first time empirical evidence on the validity of the catering theory in the context of spinoffs.EThOS - Electronic Theses Online ServiceGBUnited Kingdo

Pensions: Now something more to worry about (for dealmakers)

MARC Working Paper Series - 2017

Managerial wealth, behavioural biases and corporate monitoring : impact on managerial risk taking and value creation in UK high-tech and low-tech acquisitions

While the traditional agency model assumes managerial risk aversion and underinvestment in high-risk opportunities, the behavioural agency model allows for risk seeking by managers leading possibly to over-risky investments. Corporate governance mechanisms through their disciplining roles can steer managers towards optimal risk and avoid value destruction from either risk-deficit or risk-excess on the part of their managers. None of the existing studies offer a complete picture of managerial risk taking by allowing for both managerial risk aversion and risk seeking. The painting of just such a picture is the primary focus of this thesis. This thesis aims to answer the following two research questions in the context of corporate acquisitions: 1. What are the factors that drive managers to undertake risky projects? 2. To what extent is firm performance related to the optimal or suboptimal risk level of an investment project? This thesis investigates 289 UK domestic high-tech acquisitions and 289 matching low-tech acquisitions over the period 1993-2000. High-tech acquisitions are argued to be riskier than low-tech acquisitions. This thesis documents that fixed compensation, annual bonus, and LTIP cash provide few incentives for managers to conduct risky acquisitions. It finds significant evidence that equity-based wealth (such as LTIP shares, stock options and managerial shareholdings) which links managers' wealth to firm stock performance, has a nonlinear incentive effect on managers' selection of acquisition risk. At a low level, it encourages managers to pursue risky acquisitions. However, at high levels it discourages managerial risk taking. This nonlinear effect is mainly contributed to by managerial shareholdings. No evidence is found that stock options make managers select riskier acquisitions. Strong evidence is found that a high level of managerial wealth, which induces managerial risk aversion, can weaken the incentive alignment effect of equitybased wealth. This thesis finds significant evidence that managerial behavioural biases (such as overconfidence, over-optimism, and hubris) boosted by good past performance, firm glamour ratings by the stock market and a flattering media profile induce managers to engage in risky high-tech acquisitions. Corporate monitors are generally ineffective in disciplining managers' selection of acquisition risk. Overall, this thesis concludes that what makes managers take risky acquisitions appears to be the internal factors, i. e., factors that work within managers' inner selves and give them more confidence that they can control risks. External factors such as corporate monitoring devices that try to control managerial behaviour, do not necessarily boost managers' confidence in their risk managing capabilities. Regarding post-acquisition performance, this thesis documents that UK hightech acquisitions in the 1990s do not bring any value to acquirer shareholders up to three years after acquisition completion. However, high-risk high-tech acquisitions do not necessarily destroy more shareholder value than low-risk low-tech acquisitions. Acquisitions that are identified as at 'optimal' risk level perform better than under-risk acquisitions. Indeed, more shareholder value is created in acquisitions that are over-risk than acquisitions that are either optimal-risk or under-risk. Therefore, this thesis suggests that many UK acquirer managers during the period over 1993-2000 have foregone valuable but high risk growth opportunities and destroyed shareholder value more by being excessively risk-averse rather than being adventurous in their risk choices.EThOS - Electronic Theses Online ServiceGBUnited Kingdo

Feasibility of utilising address card system for obtaining accurate address of patients under programme conditions

An addresscard, one on which patient's home address is asked to be recorded by a person knowing for sure the patient's address, was investigated for acceptability and efficiency, in two Government hospitals located in semiurban areas and six Primary Health Centres located in rural areas in North Arcot district. In all 394 address-cards were given to the patients from the eight centres, of which 374 were returned with the address filled in, showing an acceptability rate of 95%. In all, 373 Type A letters were then posted to these addresscard addresses in respect of which acknowledgment cards were received back from 306 (82%) patients. For 140 patients, the recorded addresses were found to be the same as on the addresscard and the treatment card: In the remaining 233, there was some difference between the two addresses. Type B letters were then posted to the 233 patients at their treatment card address. No definite information was available regarding the receipt of one or both types of letters in respect of 80 patients; so, an attempt was made to visit these patients in their homes to find out the fate of these letters. Of these, no information could be collected in 9 patients. Out of 224 patients for whom information regarding the receipt of letter was available, 143 (64%) patients received both letters and 16 (7%) received neither Type A nor Type B letter. Twenty one (9%) had probably or definitely not received the Type A letter, but had received the Type B letter. Forty four (20%) had definitely or probably not received the Type B letter, but had received the Type A letter