Australian Capital Market Research Articles

CEO pay-risk sensitivity, firm policies, and 2009 Australian tax reforms

PurposeThe purpose of this paper is to examine the effects of chief executive officer (CEO) vega on firm policies in the Australian share market based on a panel data set drawn from the 137 Australian public firms for the period 2003-2012.Design/methodology/approachTo allow mutual causation between our variables, the authors use the two-stage least squares estimation method, controlling for firm fixed effects. The authors use the difference-in-differences model to test whether the 2009 Australian tax reforms may discourage high-vega CEOs to take value-enhancing risks.FindingsThe authors find the evidence that vega induces CEOs to adopt the riskier financial policy in the Australian capital market. This evidence is further supported by the negative association between vega and firm conservative activities including cash and hedging policies. Further, the result shows that the 2009 tax reforms reduce the CEOs’ willingness to engage in risky financial policy. This finding implies that regulators may restore the 2009 reforms’ “deferred tax point” back to its pre-2009 form.Originality/valueBased on the study’s results, firms should grant CEOs more out-of-the money options with a longer time to expiration to offset the 2009 tax reforms’ negative impact on the CEO’s incentive to take value-enhancing risks.

Global financial crisis, ownership structure and firm financial performance

PurposeThis paper aims to investigate the financial performance of listed firms on the Australian Securities Exchange (ASX) over two sample periods (1998-2007 and 2008-2010) before and during the global financial crisis periods.Design/methodology/approachThe generalized method of moments (GMM) has been used to examine the relationship between family ownership and a firm’s performance during the financial crisis period, reflecting on the higher risk exposure associated with capital markets.FindingsApplying firm-based measures of financial performance (ROA and ROE), the empirical results show that family firms with ownership concentration performed better than nonfamily firms with dispersed ownership structures. The results also show that ownership concentration has a positive and significant impact on family- and nonfamily-owned firms during the crisis period. In addition, financial leverage had a positive and significant effect on the performance of Australian family-owned firms during both periods. However, if the impact of the crisis by sector is taking into account, the financial leverage only becomes significant for the nonmining family firms during the pre-crisis period. The results also reveal that family businesses are risk-averse business organizations. These findings are consistent with the underlying economic theories.Originality/valueThis paper contributes to the debate whether the ownership structure affects firms’ financial performance such as ROE and ROA during the global financial crisis by investigating family and nonfamily firms listed on the Australian capital market. It also identifies several influential drivers of financial performance in both normal and crisis periods. Given the paucity of studies in the area of family business, the empirical results of this research provide useful information for researchers, practitioners and investors, who are operating in capital markets for family and nonfamily businesses.

Effect of catastrophic disaster in financial market contagion

AbstractThe study examined the contagion effect of financial market volatility from Australian capital market to Indian, New Zealand, Hong Kong, Chinese, Taiwan, and Japanese capital markets due to Australian catastrophe. In the first stage, we employed two-variable vector autoregression (VAR) model for calculating the residuals of the daily index return. In the second stage, we used adjusted correlation coefficient for detecting the significant increase in correlation coefficient of the VAR residuals after the catastrophes. Finally, Fishers r to z transformation was used for identifying contagion. After Victoria bushfire, a significant increase in the adjusted correlation coefficient of Australia with India and Hong Kong and their respective z > +1.96 validates contagion. The adjusted correlation coefficient of Australia with China and Japan increased after the Victoria bushfire but the z 0.05) does not confirm contagion, but rather exposed the persistence of high economic linkage. Apar...

The Role of Blockholders in Capital Structure

This paper examines the impact of concentrated equity ownership (blockholders) on the corporate debt maturity structure within the framework of agency theory. Using a novel and hand-collected data set from 2000 to 2015 in Australia, we find support for our hypothesis that debt maturity is a concave function of block ownership, which is likely a reflection of the conditions of the Australian capital market. Our findings contribute to empirical evidence on the monitoring effects of blockholders and the use of debt maturity to control for debt-equity and manager-equity conflicts.

The determinants of debt maturity in Australian firms

AbstractWe examine the determinants of debt maturity in the Australian capital market with the Top 400 firms listed on the Australian Securities Exchange for the period 1989–2006. We find that Australian firms not only exhibit a positive leverage–maturity relationship but also use short‐term debt to signal their high quality to the market. Our results are robust to different estimation methods that control for endogeneity and error‐dependence. We also find that ignoring the interaction between leverage and maturity can lead to erroneous conclusions about the support for the matching principle, the agency costs hypothesis and the transaction costs hypothesis.

The Low P/E Effect and Abnormal Returns for Australian Industrial Firms

While the low P/E effect has been examined rather extensively in international markets particularly in the US, there is a notable absence of Australian market-based P/E studies. This research examines the relationship between the investment performance of Australian Industrial common stock and their P/E ratios in an attempt to uncover potential for a P/E based trading strategy. The excess and differential returns of P/E ranked portfolios containing 1310 Industrial firms over a 9 year period (January 1998 to December 2006) are examined. The results show the existence of a low P/E effect in the Australian capital market. Furthermore, the superior returns of low P/E stocks increase when a consensus of two business failure prediction models is applied to the portfolio of low P/E stocks. The statistically significant risk-adjusted returns afforded to hypothetical investors over the sample period (up to 12?% per annum), not only provide support for a P/E based trading strategy, but also suggest a violation of the semi-strong form of the Efficient Market Hypothesis.

ASIC actions: canaries for poor corporate governance?

PurposeThe purpose of this study is to investigate whether companies subject to an Australian Securities and Investment Commission (ASIC) action have poorer corporate governance than other companies. Evidence from the USA suggests such a relationship but the issue has not been investigated for Australian firms.Design/methodology/approachThe paper considers a matched sample of 240 companies, including 120 which were subject to 143 actions relating to; interpretation of accounting standards; the continuous disclosure regime; and other governance matters during the period 1998‐2004.FindingsWe find that companies subject to ASIC actions are less likely to comply with the Australian stock exchange (ASX) best practice governance recommendations and that the main area of difference relates to separation of the roles of the CEO and board chair.Research limitations/implicationsWe were able to investigate only 3 of 10 items in the ASX recommendations due to data availability. The sample of ASIC companies is not randomly drawn, thus our results are not generalisable the wider population of listed companies. Capital market consequences of ASIC actions, such as effect on share price, bid‐ask spread, analyst following and cost of capital, are not considered and could be investigated in future research.Practical implicationsThe results suggest that, in relation to publicised cases, ASIC is effective in targeting more poorly governed companies, a positive signal for Australian capital markets.Originality/valueFew papers investigate ASIC's publicised cases and no prior study has linked ASIC cases and corporate governance practices. The findings will be of interest to Australian capital market participants, some of whom question the benefits of corporate governance recommendations.

The determinants of the hybrid security issuance decision for Australian firms

The Australian capital market has number of distinct characteristics that distinguish it from typical U.S. and European markets. There is a limited listed debt market where most firms use bank debt, convertible debt is not callable and stand alone warrants are used to raise capital. This paper examines the determinants of security choice for hybrid issuers in the Australian market. The results support the pecking order model and the impact of financial distress costs and taxation. Alternatively, the results provide support for the sequential financing model where firms with high profitability use convertible debt and firms with low profitability use warrants, to solve the sequential financing problem.

Catastrophic Shocks and Capital Markets: A Comparative Analysis by Disaster and Sector

This paper provides an analysis of the impact of natural, industrial and terrorist disasters on the Australian capital market using the Box and Tiao intervention analysis and the data on daily returns in the following 10 market sectors: consumer discretionary, consumer staples, energy, financial, healthcare, industrial, information technology, materials, telecommunication services and utilities. Inter alia, it was found that the shocks provided by natural disasters have an influence on market sector returns, depending upon the sector in question. The sectors most sensitive to disasters of any type are the consumer discretionary, financial services and materials sectors while the most significant single event during the past 8 years would appear to be the September 11 terrorist attack, at least in terms of its impact upon the capital market.

Putting Their Money Where Their Mouth Is: The Importance of Shareholder Directors Post Listing

While Luoma and Goodstein (1999) find increased stakeholder representation on the boards of American companies, Dimovski and Brooks (2004) provide evidence that the Australian initial public offering (IPO) market does not require non equity stakeholder representation on their boards. This paper analyses the change in composition of the boards of large Australian companies post listing. We find a substantial increase in the number of directors holding equity capital in the firms in which they hold their directorships. We also find a decrease in the number of non equity stakeholder directors post listing. This suggests that directors putting their money into the firms in which they have a stewardship function is an important element in the Australian capital market.

What’s in a Name? Evidence on Corporate Name Changes from the Australian Capital Market

This paper investigates the economic impact of corporate name changes around the time of their announcement. We analyse a sample of 107 listed Australian companies that changed their name over the period January 1995 to December 1999. We conduct separate analysis of firms having ‘major’ versus ‘minor’ name changes; of firms with coincident financial restructuring versus firms without restructuring; of small firms versus large firms and of dotcom firms versus non‐dotcom firms. Generally, we find some evidence of a negative association between the corporate name change event and abnormal returns. This seems particularly the case for those companies whose name change is deemed to be ‘major’.

The Pricing of Underwriting Services in the Australian Capital Market

Recent media releases have placed enormous strains on the credibility of the underwriting industry. It has been alleged that underwriters in the US and UK collude and fix underwriting fees. In contrast to recent evidence on the underwriting spread in the US (Chen and Ritter, 2000), we find that the Australian underwriting fee is not clustered at one particular percentage. Using 282 underwritten industrial IPOs from 1980 to 1996, our results show that underwriters systematically price their services according to firm-specific variables such as the offer size, the subscription period of the issue, the retained ownership after the IPO, the offer price, and whether underwriters receive options as part of their compensation.

The pricing of underwriting services in the Australian capital market

Recent media releases have placed enormous strains on the credibility of the underwriting industry. It has been alleged that underwriters in the US and UK collude and fix underwriting fees. In contrast to recent evidence on underwriter spreads in the US (Chen, H.-C., Ritter, J.R., 2000. The seven percent solution. Journal of Finance, in press.), we find that Australian underwriting fees are not clustered at one particular percentage. Using 282 underwritten industrial IPOs from 1980 to 1996, we find that underwriters systematically price their services according to firm-specific variables such as the offer size, the subscription period of the issue, the retained ownership after the IPO, the offer price, and whether options form part of the underwriter's compensation.

The use and representational faithfulness of graphs in Australian IPO prospectuses

This paper investigates the use of graphs, selection of variables to graph and construction of graphs in prospectuses issued by Australian companies making their initial public offering (IPO) of shares to the Australian capital market. The paper formulates and tests hypotheses concerning selectivity in the use of graphs and distortion in the construction of graphs presented in IPO prospectuses, as well as providing descriptive evidence about the use of graphs in such prospectuses. Results show that firms enjoying improving profit performance are significantly more likely to include graphs of key financial variables in their prospectuses than firms suffering deteriorating profit performance. Thus, similar to studies of graphs in annual reports, evidence of selectivity in the inclusion of graphs is found. No significant relationship is found between performance on the variable being graphed and distortion in the construction of the graph. When the graphs are split between those covering key financial variables and other variables, a significant relationship is found in both categories. For graphs of other variables, a significant positive association is found between performance and distortion. However, the relationship for key financial variables is in the opposite direction to that suggested by impression management. Further analysis identifies significant sub‐period differences in selectivity and distortion which are consistent with the view that the major regulatory and institutional changes outlined in the paper, reduced the extent of selectivity and graphical distortion in the post‐1991 period. As far as we are aware, this is the first study reported in the literature to investigate the use of graphs in prospectuses. The results also have policy implications for the regulatory authority in Australia.

The value of dividends: Evidence from cum‐dividend trading in the ex‐dividend period

What is the market value of a dollar of fully franked dividends? We address this question by exploiting a new phenomenon in the Australian capital market—the trading of shares cum‐dividend during the ex‐dividend period. This allows a relatively clean measurement of the combined value of dividends and the associated tax effects net of transactions costs. Consistent with the theoretical model that we develop, the evidence from this sample is that one dollar of fully franked dividends, after tax effects and transaction costs, is worth significantly more than one dollar. We also show that, in contrast to our measure, the traditional measure of the ex‐dividend price drop‐off, based on close to close prices, has a lower average value and exhibits substantially more cross sectional variation.

Beta stability and monthly seasonal effects: evidence from the Australian capital market

A number of studies exist across a range of equity markets showing that a significant proportion of stocks in those markets have betas that vary over time. A research challenge posed by this body of evidence is to identify the factors that explain this time variation in individual stock betas. There is also an extensive literature reporting the existence of strong monthly seasonal patterns in equity returns from many markets and across extraordinarily lengthy time periods. Accordingly, using monthly Australian equity returns data, this paper investigates whether seasonal regularities such as the January effect can provide an explanation of beta variation. A key finding of this paper is that taking account of the January monthly seasonal and other monthly seasonals has no effect on the beta stability characteristics of individual stocks. Hence, based on our analysis, seasonal effects does not provide an explanation of beta instability. A subsiduary finding is that stocks with significant monthly seasonal effects tend to have a smaller average market capitalization.

A simple model for pricing imputation tax credits under Australias dividend imputation tax system

The equilibrium value of imputation tax credits has important implications for corporate and portfolio investment in the Australian capital market. Two features of Australia's tax credit system are (i) the credits are available only to a subset of investors (taxable residents) and (ii) trading in tax credits is restricted. Modelling these features indicates that non-residents will have zero demand for some Australian assets. For assets held by non-residents, the value of tax credits will be a function of the aggregate demand for risky assets by taxable residents relative to the demand of all investors in the Australian market. This suggests that the value of tax credits hinges on the extent to which the Australian market is integrated with foreign markets. Finally, if the restriction on selling tax credits is relaxed, the equilibrium value of tax credits will be higher than this simple model indicates.

Evidence of imputation clienteles in the Australian equity market

This paper investigates the development of shareholder clienteles in response to the introduction of the Dividend Imputation (Integrated Tax System) into the Australian capital market. It is found that companies paying franked dividends have significantly increased dividend payments relative to companies paying little or no imputation tax credit. It is also shown that the use of dividend reinvestment plans has increased significantly post-imputation. This is interpreted as support for the existence of shareholder clienteles related to companies' imputation policies.

Australian venture capital market revisited

Recent literature has raised differing perspectives on the characterization of venture capital market in Australia. Through an in-depth analysis of the Australian venture capital market, this paper addresses a number of issues, including definitional problems of venture capital, nature of financing instruments, and the types and number of market participants. It is contended that if a restrictive definition of venture capital and a simplistic notion of the nature of venture capital investment are adopted, then erroneous conclusion regarding the scope of investment and size of the Australian venture capital market will arise.

Financing high technology: The Australian venture capital market

To remedy a shortage of venture capital for the development of emerging high-technology businesses, the Australian government in 1984 initiated a Management and Investment Companies (MIC) program. Under the program, 11 MICs were licensed to raise venture capital from investors who are allowed to claim 100% of their investments as a tax deduction. This study identified a total of 47 venture capital organizations of different ownership structures and investment preferences. Undoubtedly, the MIC program has played a catalytic role in the rapid development of this market to its current capital base of A$353 million. However, there are still segments within the market where venture capital supply is deficient. Further, the recent stock market downturn has dampened the venture capital supply government initiative in reviewing its policy framework at this juncture is crucial in order to remove impediments and create a positive environment conducive to the long-term development of the venture capital market in Australia.