Good Corporate Governance

Good Corporate Governance

Components of comparison	Article from CRP	Article from Students
Title	Identification of Role of Social Audit by Stakeholders as Accountability Tool in Good Governance	Good Corporate Governance in Asia
Topic	Good Corporate Governance	Good Corporate Governance
Theory used by article/ research	Social audit is evaluation of social performance and its relevance to the felt needs of the society. Praveen Kumar (2000) has explained that Accountability gives sanctity to power and makes it more meaningful and relevant in the scheme of governance. Dhiraj Nayyar (2000) concluded that most of the failures of the state came about because of poor implementation, which is a result of weak or nonexistent institutions. Gore (1994) opined that it is now possible for a president whether of a company or of a country — to decentralize yet at the same time keep field operators fully informed and accountable for results. Angela Liberator (2004) observed that accountability is a term that requires many specifications, namely whose accountability to whom and how. Gray Owen (1996) opined that Social Auditing is a process that enables an organization to assess and demonstrate its social, economic, and environmental benefits and limitation. It is a way of measuring the extent to which an organization lives up to the shared values and objectives it has committed itself (Boyd, 2005).	Publication of the Cadbury Report (1992) in the United Kingdom of Great Britain and Northern Ireland. The objective of the Cadbury Committee was to investigate how large public companies should adopt corporate governance guidelines with a focus on the procedures of financial report production and the role of the accounting profession. Issues included the role of the board of directors, standards of financial reporting, accountability of auditors, and directors’ pay. Greenbury Report (1995) which was released to address in more detail the remuneration of Executives and non-executive board members. The Report recommended the setting up of a remuneration committee in each public company to determine the remuneration packages for the board members. It also provided suggestions on the disclosure of remuneration and the setting up of remuneration policy and service contracts and compensation. Hampel Report (1998) in the United Kingdom that supposedly served as a concluding study on the issues raised by the Cadbury and Greenbury Reports. Four major issues were discussed with practical guidelines offered: a)      the role of directors; b)      directors’ compensation; c)      the role of shareholders; d)     Accountability and audit.
Hypothesis of research	Social audit is for fixing the accountability by stakeholders	Individual countries should first focus on improving national standards of regulation and corporate practice rather than attempt to reach a common set of matrices from the start. When appropriate governance standards are in place in individual countries, codes of best practice could then be integrated into a consistent framework for all countries to develop more regionally integrated capital markets.
Variables used in research	Transparency and information flow for the stakeholder Efficiency and productivity Governance’s reliability Pertinent international data of institutional holdings of equity. Summary of OECD principles of corporate governance Investors’ willingness to pay a premium for good corporate governance summary information for market capitalization of 7 major stock exchanges of OECD countries (including Japan) and 10 emerging stock exchanges in Asian economies. The amount of funds raised in stock exchanges in selected economies in the years 2001 and 2002. summary of the importance of national stock markets in 2001 measured by the percentage of stock market capitalization as a percentage of GDP using data from the IMF database. The turnover on the stocks of domestic and foreign companies in 7 OECD stock exchanges and 10 Asian stock exchanges in 2001 and 2002. Average amount traded per day, the average number of transactions, and average value of transactions in these markets. The sample of OECD stock exchanges had a total turnover of US$ 26.5 trillion, or 93.6 per cent of all turnovers in the exchanges represented  in 2002 Overview of the regulatory bodies and clearing settlement Organization for OECD and Asian stock markets. Market capitalization can be classified as being family-owned. The listed companies, market capitalization and turnover in the second boards of three European and seven Asian markets.
Method of analysis	The Test and Retest reliability SPSS	OECD model ü Table 1 provides pertinent international data of institutional holdings of equity. ü Table 2. Summary of OECD principles of corporate governance ü Table 3. Investors’ willingness to pay a premium for good corporate governance ü Table 4 presents summary information for market capitalization of 7 major stock exchanges of OECD countries (including Japan) and 10 emerging stock exchanges in Asian economies. ü Table 5 presents information on the amount of funds raised in stock exchanges in selected economies in the years 2001 and 2002. ü Table 6 provides a summary of the importance of national stock markets in 2001 measured by the percentage of stock market capitalization as a percentage of GDP using data from the IMF database. ü Table 7 reports the turnover on the stocks of domestic and foreign companies in 7 OECD stock exchanges and 10 Asian stock exchanges in 2001 and 2002. ü Table 8 reports the average amount traded per day, the average number of transactions, and average value of transactions in these markets. Table 7 reports that in 2002 the sample of OECD stock exchanges had a total turnover of US$ 26.5 trillion, or 93.6 per cent of all turnovers in the exchanges represented in the table. ü Table 9 provides an overview of the regulatory bodies and clearing settlement Organization for OECD and Asian stock markets. ü Table 10 shows that approximately 58.0 per cent of all Asian companies (by market capitalization) can be classified as being family-owned. ü Table 11 summaries the number of listed companies, market capitalization and turnover in the second boards of three European and seven Asian markets.
Result of the analysis/ research (Conclusion)	Largest percentage of responses, both during test and retest, are in the “agree” category, those who are agree with the statement given (55.2% during test and 50.4% during retest.) Any good Governance initiative, Government and Corporate, will help in popularizing social audit as it has wider acceptability among stockholders These benefits or role areas can be summarized as follows: ü  Stakeholders accepted that social audit helps the government in monitoring, accounting for and reporting the activities/actions. ü  The exercise of social audit improves social, ethical and environmental performance. ü  Public is convinced and confident that social audit contributes towards achievement of efficacy and effectiveness of the administration. ü  The important finding was that it creates confidence on governmental actions in the community. ü  It makes administration more transparent and accountable. ü  It provides verifiable data to substantiate claims on social performance. ü  It enhances inclusions, partnership and participation. ü  Collectively, social audit is a tool for social accountability in good governance.	In Asian countries, however, institutional investors typically represent a small portion of stock market activities. Corporate managers hence may not see an immediate need to impose corporate governance policies. Studies have suggested that there is a demand for good governance practice and good governance could be rewarded by a premium paid by investors. On macroeconomic considerations, good corporate governance will contribute to the stability of the local equity market since investors, in particular foreign institutional investors; will have a greater interest to commit long-term funds to the local market. Such a commitment will be beneficial to long-term economic development in Asian countries.

Understanding and Accessing Financial Markets-Event Study (Foreign Investment)

Understanding and Accessing Financial Markets-Event StudyComponents of comparison	Article from CRP	Article from Students
Title	Foreign Ownership and Investment: Evidence from Korea	China’s pattern of trade and growth after WTO accession Lessons for other developing countries
Topic	Whether an increase in foreign ownership affects investment in Korea.	Review China’s post-WTO transition experiences, synthesize and  update studies on China’s pattern of trade and structural transformation, and provide both positive and negative lessons for other developing countries
Theory used by article/ research	Modigliani and Miller (1958) maintained that firm’s investment depend solely on the profit opportunity. Jensen and Meckling (1976), Managers who are not owners may pursue their own interest not the stockholder interest. Jensen (1986) Argues that managers tend to spend all available funds on investment projects at their own discretion. Foreign ownership is inversely related to information asymmetry between firms and the market. (Jiang and Kim, 2004) DFI eases credit constraints by bringing in capital, foreign firms were less credit constrained than domestic firms. (Harrison and McMillan, 2003) Foreigners prefer large firms, firms paying low dividends, and firms with large cash positions. (Dahlquist and Robertsson, 2001) Foreign investors have a tendency to demand better corporate governance in order to protect their investments. (Rajan and Zingales, 1998)	The fact As of 2008, the real gross domestic product (GDP) expanded at an annual average  pace of more than 10 percent China has grown to be the third largest economy and the third largest trading nation in the world. In 2008 alone, 73 cases AD cases and 10 CVD cases were initiated against China’s imports. It is now the right time to asses China’s experiences from implementing WTO commitment in the last eight years, and to draw some lessons for currently acceding countries and recently acceded WTO members. (After eight years the WTO accession, China’s transition period as a new WTO member is over) A new World Bank study showed that using the $1.25 per-day consumption measure, the proportion of the population living in poverty feell from 84 percent in 1981 to 15.6 percent in 2005 , and over 600 million people were lifted out of poverty ( Chen and Ravallion, 2008) According to previous studies, pragmatic policy reforms that established homegrown institution , which resulted from the wealth of understanding gained from policy experimentations, seemed to be the key to growth and poverty reduction in the first stage of reforms ( Lin 2007, Wang 2005) Trade tension is on the rise with major trading partners as reflected by the number of anti-dumping and countervailing cases ( Zhao and Wang 2008) * If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be “dumping” the product. The WTO agreement does not pass judgment. Its focus is on how governments can or cannot react to dumping — it disciplines anti-dumping actions, and it is often called the “Anti-dumping Agreement”. ww.wto.org * Countervailing duties (CVDs) are duties imposed under WTO Rules to neutralize the negative effects of subsidies. They are imposed after an investigation finds that a foreign country subsidizes its exports, injuring domestic producers in the importing country. According to World Trade Organization rules, a country can launch its own investigation and decide to charge extra duties,
Hypothesis of research	Cash flow sensitivity of investment is lower in firms with high foreign ownership than in firm with low foreign ownership.	Market liberalization alone is not sufficient, and economic system reform and the liberalization are closely related and complement and promote each other. Experimentations via special economic zones (SEZs) and opening to foreign direct investment (FDI), which facilitated and supported cluster development and learning by doing, are needed for industrial upgrading and export competitiveness.
Variables used in research	· Kt Captal at the beginning of period t · It Capital expenditure during periond t · Qt Average Q at the beggining of period t · TAt Total asset at the beggining of period t · Bt BV at the beggining of period t · Et Market value of equity at the begng t · CFt Cash flow during period t · Highi 1 for firm with high for own, 0 for low · Lowi 1 for firm with low for own, 0 for high · Beforet 1 before 1998, = 0 after 1998 · Aftert 1 after 1998, = 0 before 1998	Chinese government regulations (Export VAT rebate policy, Export regulations, Foreign Investment Regulations). Shares of domestic and foreign value added
Method of analysis	OLS estimation method for dynamic investment models is likely to result in biased estimates because of endogeneity and heterogeneity problem. Generalized method of moments (GMM) is used for dynamic panel models and depends mainly on the adoption of appropriate instruments and the efficient elimination of unobserved firm effects.	HIY method Hummels, Ishii, and Yi (2001) proposed a concept of vertical specialization in a country’s trade, defined as “the imported input content of exports, or equivalently, foreign value added embodied in exports,” and provided a formula to compute vertical specialization share based exclusively on a country’s input-output table. However, a key assumption needed for their formula to work is that the intensity in the use of imported inputs is the same between production for exports and production for domestic sales. KWW method refers to estimates from using the approach developed by us that takes into account special features of processing exports.
Result of the analysis/ research (Conclusion)	Many countries, in fact, experienced severe instability in capital markets after abruptly opening their stock markets. The findings simply suggest that foreign ownership plays a role in reducing financial constraint on firms, and thus improves accessibility of external financing for investment. In addition to capital inflows, the relaxation of the information asymmetry can also be a potential benefit of open financial markets.	Global economic factors such as the WTO accession, Doha development Agenda and the recent financial turn oil in the USA reinforce the need to rebalancing China’s growth Recent global economic crisis has enhanced China’s own determination to engage in institutional reforms to achieve a better, greener, and more sustainable growth development path.

Relations among Financing Decision, Dividend Policy, and Ownership

Relations among Financing Decision, Dividend Policy, and Ownership

Components of comparison	Article from CRP	Article from Students
Title	Interrelationships among Capital Structure, Dividends< and Ownerships : Evidence from South Korea, by Yong H. Kim, Jong C. Rhim, and Daniel L.Friesner	Financing Innovation: The Role of Norwegian Venture Capitalists in Financing Knowledge-Intensive Enterprises
Topic	Relations among financing decision, dividend policy and ownership	The roles and Function of Norwegian venture capital Industry in the innovation system by analyzing its investment preferences and behavior when financing and following up portfolio enterprises.
Theory used by article/ research	Principal Agent Problem – the conflict of interest between a firm’s owners and managers. Agency Cost – ensure that the firm’s management acts in appropriate fashion. Convergence of interest theory: Debt and ownerships are subtitutes-twomeans of accomplishing the same task. Stock ownership is expected to have a negative effect on leverage if convergence of theory holds. Entrenchment theory: Insider ownership  have a positive impact on leverage if the entrenchment theory of Morck et al. (1988) holds, because new debt policy must be used in conjunction with ownership to ensure that management acts appropriately. Dividends are expected to have positive impact on debt if the entrenchment theory is valid, because both can be used to reduce cash flows and liquidity that would otherwise be misused by management. Pecking order theory: According to the pecking order theory of Myers and Majluf (1984), management prefers internal funds (available liquid assets) to leverage, in part because liquid assets can be spent in a more discretionary, and potentially sub-optimal, manner. This increases agency costs, and in turn increases the need for debt financing to reduce the use of internal funds. Consequently, both cash flow and liquidity are expected to have a negative impact on debt. Since more profitable firms have ample stored funds, profitability should exhibit a negative relationship with leverage. Signalling theory, managers are willing to use leverage and or dividends as a means of providing a positive signal to capital markets.	Venture Capitalists typically exit their portfolio firms between 3 and 7 years after the investment and they achieve their return in the form of capital gains rather than by dividend income (bygrave & Timmons, 1986,1992) Venture Capital undertakes a variety of roles in the venture Capital process-fundraising, selecting and follow –up ventures, and exiting their investments (gompers & Lerner, 2000) Venture Capitalist are investors with inside or “private” knowledge of innovative projects, and they normally posses more industrial competence than do traditional financial investors. They represent a type of investors’ which are assumed to more able to select an monitor profitable projects , add value to  enterprises and to handle high risk and possibly high return projects (Manigart and Sapienza, 2000) Both fixed and relational assets may explain the spatial clustering of Innovation and capital which seems to characterize a knowledge economy (Powel et. All 2002)
Hypothesis of research	There are a relationship between debt policy, dividend policy, and ownership structure.	The Norwegian venture capitalists contribute / play in the innovation system as a contributor of capital and competence.
Variables used in research	Firms leverage (LEV): The ratio of total debt to book value of total assets. Dividends (DIV): The ratio of cash dividends to operating income. Firm’s ownership (OWN): Measured by the percentage of stock owned by insiders Firm’s cash flow (CF): Calculated as the ratio of net income plus depreciation to total assets. Firm liquidity (CR): Measured as the ratio of current assets to current liabilities. Profitability (PRO): The ratio of net income to net sales. Firm’s size (SIZE): Characterized by the natural log of market value of equity.	240 portfolio enterprises: Caharacteristic Financial aspects Strategic activities of venture capitalisr
Method of analysis	2SLS OLS Tobit 3S 3 stage least squares (3SLS) methodology Preferred over the ordinary least squares (OLS) method as the latter leads to biased and inconsistent parameter estimates when a system has interdependent endogenous variables.	Survey and Summarizes some of the most important factors which influence the location and investment preferences of venture capitalist and classifying : The Norwegian Venture Capital Industry Venture Capital investment-Urban and High tech Identified the reasons for the entrepriises to contact venture companies.
Result of the analysis/ research (Conclusion)	The debt equation result See some striking differences in sign, magnitude, and significance particularly with regard to the ownership, dividend, and profitability variable. The dividend equation results The Own and LEV coefficient estimates are both significantly positive, implying that not only are debt and dividend policy complementary, but also the higher ownership level leads to higher dividend, possibly to prevent entrenched managers from acting in a manner inconsistent with stockholder. The ownership equation results - The CF and CR variables have negative and significant coefficient estimates implying that liquidity is not significant determinant of managerial ownership. -  SIZE is not significant -   CF statically significant Conclusions: -  The higher levels of ownership and dividends negatively affect leverage. - Ownership and leverage both positively impact dividend. -  Leverage negatively associated with ownership, while dividend positively impact ownership.	First it shows s that the majority of the studied 240 portfolio firms were newly established when the survey took place in 2003. Near two-thirds of them were founded later than 1995, and every fifth firm in the past 2 years. This indicates that venture capital is financing firms in early stages when there is a great need for both capital and competence. The assertion that venture Capital involves more than money has also some extent been corroborated. Granted, access to risk  capital is certainly the most important reason why enterprises contact venture companies. The more general questions of industrial dynamics and spatial development of a knowledge economy is that most signs indicate that such an economy also in the near future will remain an urban economy. Cities will probably continue to be significant production sites for knowledge-intensive industries and stay on as important institutional settings and nodes for information services and supportive infrastructures.

DIVIDEND POLICY

Components of comparison	Article from CRP	Article from Students
Title	The Effect of Asymmetric Information on Dividend Policy	Managerial Ownership And Dividend Policy In The U.S. Banking Industry
Topic	Dividend Policy The effect of asymmetric information on dividend policy in light of an alternative explanation based on the pecking order theory.	Dividend Policy Determine the relationship between managerial equity ownership and the levels of the dividend paid out.
Theory used by article/ research	Pecking order theory, in the presence of asymmetric information, a firm may underinvest in certain state of nature. Signaling theory, the information asymmetry pertains to current earnings and the level of investment.	Agency theory states that managers of firms are likely to engage in non valueing maximizing (NVM) behavior. The value of the firm would be decreased by the agency costs incurred due to NVM manager. ( Jensen and Meckling 1976). The two decisions of managers that generally have a significant impact on stock price are: Choice of how much debt to hold in the firm’s capital structure Choice of how much of earnings to pay out as dividends (healy and Palepu 1989)
Hypothesis of research	The pecking order theory predicts that the higher the analyst following, the higher the dividend The signaling predicts that the higher the analyst following, the lower the dividend.	The insider owners may decide the level of dividends payout with a desire to increase the value of their shareholdings via lower issuing cost and/ or avoiding the negative price impact of share-issuance.
Variables used in research	Dependent variable Conventional dividend yield (DIVYLD) Independent variable -   Insider ownership -   Analyst following -   Growth opportunities (MTOB) -   Cash flow (CFTOB)	Financial variables: Dividend payout Total liabilities over total consolidated asset Percentage of common stock held by officers and directors Percentage of total assets that have been designated as “charge offs” Net interest margin, as percentage of consolidated assets Net non-interest margin, as a percentage of total consolidated assets. Provision for lease and loan losses, as a percentage of total consolidated assets. Independent variables: IHSQ SIZE PFDDIV CHGOFF NIM NETNON PROVILL
Method of analysis	Tobit Model Both dividend-paying and non-dividend paying firms. Yi* = β’X + εi Yi* =optimum dividend level for firm i Yi =measured dependent variable (of optimum dividend level) X =vector of explanatory variables Εi =Disturbance term	2SLS Regression With three equation, namely DIVPAY, INSIDER, and DEBT as dependent variable
Result of the analysis/ research (Conclusion)	Dividends are positively related to both analyst following and cash flow, but negatively related to growth opportunities. A higher analyst following implies less asymmetric information. The positive relation between dividends and analyst following is consistent with the pecking order theory and inconsistent with the signaling theory. The positive relation between dividend and cash flow and the negative relation between dividend and growth opportunity are consistent with the pecking order theory. Dividends are unrelated to the insider ownership variable when the level of asymmetric information is explicitly controlled.	As the level of insider holdings initially increases, dividend payout is decreasing. In view of signaling theory one may interpret this as substituting one signal of firm quality with another.

CAPITAL STRUCTURE THEORY

Components of comparison	Article from CRP	Article from Students
Title	An Empirical Study on the Determinants of the Capital Structure of Listed Indian Firms	The relationship between capital structure and ownership structure New evidence from Jordanian panel data By Basil Al-Najjar and Peter Taylor (research paper)
Topic	Empirical evidence on the determinants of the capital structure of non financial firms.	Investigate the comparatively under-researched relationship between ownership structure and capital structure in an emerging market.
Theory used by article/ research	Static trade off theory A firms optimal’s debt ratio is viewed as determined by a trade off of the costs and benefits of borrowing, holding the firm’s assets and investment plans constant. Myers (1984) Bankruptcy cost ( Scott 1977) Agency cost (Jensen and Meckling 1977) Loss of non-debt tax shields ( de angelo and Masulis 1980)	The relationship between firm’s ownership structure and financial policy is notable in the financial literature Leland and Pyle (1977) Relationship between capital structure and institutional ownership Chaganti and Damanpour (1991) Jensen (1992), Grier and Zychowicz (1994), Moh’d (1998), Brailsford (2002) Institutional owners play a key role in monitoring the firms in which they hold equity. Owners (shareholders) of the firm have different rights; such rights include the election of the board of directors, who will act as an agent to monitor the performance of the boards of directors Gillan and Starks (2002) In a world without friction, there is no difference between debt and equity financing as regards the value of the firm. Modigliani and Miller (1958) Thus, financing decision add no value and therefore of no concern to manager In general, debt ratios in developing countries seem to be affected in the same way and by the same types of variables that are significant in developed countries. However, there are systematic differences in the way these ratios are affected by country factors, such as GDP growth rates, inflation rates and development of capital market. Booth (2001) Agency theory suggests that an optimal capital structure and ownership structure can minimize the agency costs. Jensen and Meckling (1976, 1986) Firms with high leverage ratios provide a negative signal that the firm faces futures financial difficulties. Therefore, institutional investors prefer firms with low leverage ratios. Tong and Ning (2004)
Hypothesis of research	There is a empirical evidence on the determinants of capital structure of non financial firms for Indian firms capital structure.	Interaction between institutional ownership and capital structure in Jordan where there are differences, as regards institutional and financial structures.
Variables used in research	Explanatory variables: Non-debt tax shields (NDTS) Tangibility Profitability Business risk Growth opportunities Growth Size Agency variables ü   Big business group firms ü  Foreign private firms ü  Other firms	Jordania non-financial firms. Jordanian Shareholding Companies Guide (1999, 2000, 2001, 2002, and 2003)
Method of analysis	Used regression model	Econometrics modeling using both single equation and reduces equation models for panel data.
Result of the analysis/ research (Conclusion)	Comparative analysis of pre and post liberalization period reveals that size and risk measures are additional factors which influence capital structure decisions during post-liberalization period. Ownership pattern, which is taken as proxy to measure the impact of agency cost on financing decisions, is significant when leverage is measured in terms market value.	The results show that the Jordanian firms are subject to the same determinants of capital structure as firms in developed markets, namely: profitability, firm size, growth rate, MB ratio, asset structure and liquidity. The results reveal that asset tangibility, firm size, growth opportunities, and business risk considered to be joint determinants of ownership structure and capital structure.

CAPITAL BUDGETING and INVESTMENT DECISION

cap-bud-pp07.pptx

cap bud pp07

CAPITAL BUDGETING and INVESTMENT DECISION

Components of comparison	Article from CRP	Article from Students
Title	Capital Budgeting : NPV v. IRR Controversy Unmasking Common Assertions By Jan F.Jacob	Capital Budgeting with Taxes under Uncertainty and Irreversibility By Rainer Niemann, Tubingrn, and Caren Sureth, Paderborn
Topic	Conflict between NPV and IRR	The derivation of post-tax investment rules and neutral tax systems under risk neutrality and risk aversion for irreversible investment projects.
Theory used by article/ research	“Capital budgeting decisions are among the most important choices made by managers; selection or rejection of investment proposals defines the firm’s profitability and, in the end, its survival.” Keef and Roush (2001) “The common assertion that the NPV v. IRR controversy hinges on the rate of reinvestment… is… based on a misunderstanding.. Conflict between IRR and NPV can be attributed entirely to the effects of scale.”(Keane,1979,55) “ mathematics is a tool… economics [is] the master …[the] problem arises from confusion of this hierarchy-from trying to make economics conform to the mathematics (Herbst, 1982,92)	Under condition of uncertainty and irreversibility, real option-based models Are wideliy accepted for assessing investment project. Dixit/ Pindyck (1994), Trigeoris ( 1996) In recent years, public economics have extended real option literature by integrating taxation. Morreto (2000) By doing so, its possible to derive investment rules considering managerial flexibility, irreversibility, tax effect, and to identify tax systems that are neutral with respect to investment decision. Harchauwill/ lassere (1996), Jow (200), Pennings ( 2000) Agliardi (2001) Deterministic examples for neutral tax systems are the cash flow tax and the taxation of true economics profits. Brown (1948) In recent years, public economist was especially interested in tax neutrality under uncertainty. Samuelson (1964), and Johansson (1969) For risk neutral investors, neutral tax systems have been already been proved in the real option context, whereas neutral tax systems under risk aversion and irreversibility have not yet been derived. Niemann (1999), Sureth (1999), Sureth (2002) Integrating taxes reveals interesting differences, especially under risk aversion. Knudsen/Meister/Zervous (1999)
Hypothesis of research	The NPV-method and the IRR-method aren’t two measures of investment worth, but just one single method. The NPV/IRR-method is a plain mathematics and does not pretend to be ranking device; it cannot be used as such either.	Exercising option to invest is assumed completely irreversible, which implies that it is impossible to abandon a project during its economic life ending at time T. T maybe finite or infinite.
Variables used in research	ü  C= money units ü  Discount rate ‘per’ period (discrete), for each of three period ü  NPV	Single profits tax Operating cash flow π Depreciation allowances d Interest taxation parameter
Method of analysis	Present value method or (a variant) the method of the internal rate of return.	General assumptions Derive the optimal investment rule under uncertainty and to assess the value of the option Dynamic Programming
Result of the analysis/ research (Conclusion)	The present value method fails in numerous cases in making sound capital budgeting decisions. This is because the fact that the NPV/IRR-method meets only nominal’s.	ü  The main reason for employing real option approach instead of traditional models of capital budgeting under uncertainty are the introduction of managerial flexibility in light of irreversibility and the possibility to abstract from individual risk preferences. ü  Since neutrality conditions are always transformations of the underlying model assumptions, the differentiation between dynamic programming and contingent claims analysis is crucial with tax neutrality

SECURITIES VALUATION

securities valuation 03

SECURITIES VALUATION

Components Of comparison	Article From CRP	Article from Student
Title	Discussion of The Book-to-Price Effect in Stock Returns : Accounting for Leverage by Joseph D. Piotroski	The internationsl Investment Position of the United States at yearend 2005
Topic	Securities Valuation	Securities Valuation
Theory used by article/ research	Penman, Richardson, and Tuna (2007) contributed theoretical construction of the book-to-market ratio into two components: a net operating asset component and financial leverage. Fama and French (1992) hypothesized that book-to-market ratio proxies for financial distress risk, and hence, should display a positive relation with expected and realized return. Penman (1996) used residual income valuation framework to theoretically illustrate the expectations embedded in price for a given book-to-market ratio realization. Fama and French (1995) stated that book-to-market ratios are inversely related to future firm performance. Lakonishok, Shleifer, and Vishny (1994) stated that book-to-market ratios are inversely related to growth. They also claimed that the subsequent returns to the book-to-market strategy represent a reversal of past valuation errors. Chen and Zhang (1998) stated that book-to-market ratios are inversely related to leverage. LaPorta (1996); Dechow and Sloan (1997) found that systematic errors in market expectations about long-term earnings growth can partially explain the success of the book-to-market effect and contrarian investment strategies. Rozeff and Zaman (1998); Piotroski and Roulstone (2005) stated that insiders are more likely to sell (buy) shares in glamour (value) firms, consistent with executives trading against potential biases in expectations and valuation errors. Piotroski (2000); Mohanran (2005) stated that predictable valuation errors based on the historical financial performance of value and glamour firms cast doubt on solely a risk-based explanation for the book-to-market effect. Griffin and Lemmon (2002) showed that the book-to-market effect is increasing in the probability of bankruptcy. Jensen and Meckling (1976) argued that firms with excess cash flow are susceptible to agency problems. Wurgler (2000) could examine whether firms with higher (lower) levels of leverage respond more (less) sharply to an expansion of investment opportunities in their primary industry.	The  market value method values the owners equity share of direct investment, using indexes of stock market prices ( J. Steven Ladenfeld and Ann M. Lawson)
Hypothesis of research	Financial leverage has a negative relation with future returns Whether the observed relations are the result of endogeneity or correlated omitted variables	Private net foreign purchase of U.S securities including treasury securities, and to depreciation of most major foreign securities against the U.S dollar, which lower the dollar value of U.S
Variables used in research	Formula that the variables consist of: An unlevered, net operating asset based pricing multiple Financial leverage	Annual survey of foreign portofolio Estimation of short term U.S treasury securities Short term debt instrument reported by U.S bank
Method of analysis	The use of book values to measure economic leverage First, long term debt values on the balance sheet are assumed to approximate market values. Second, leverage must be present on the balance sheet to be included in the analysis. The classification of an operating versus financial liability Classify traditional working capital liabilities as operating liabilities and long term debt as a financial liability. Measurement of Asset Risk Examines the leverage-returns relation after controlling for the firm’s asset risk.	Estimated valued at the current cost of direct investment, estimates valued at the stock market value of direct minvestment are mentioned when the two valuations of direct investment are mentioned when the two valuations ofn direct investment.
Result of the analysis/ research (Conclusion)	Conditional on operating risk, returns are decreasing in financial leverage. The relation between leverage and returns could be an artifact of an omitted factor To the extent that financing choices, the use of variable rate or short term loans, or the retention of excess cash, are driven by some underlying firm characteristic or risk attribute, it is possible to the measurement error to predict return especially after controlling for the firms’ general level of expected asset growth and profitability. To the extent that leverage variable reflects the outcome of an endogenous capital structure choice, the fundamental factors driving each firm’s capital structure decision could also be responsible for the observed leverage returns relation. The failure to explore potential reasons for the negative relation is the greatest weakness of the paper and will likely serve as the impetus for future research projects.	At market value foreign direct investment in U.S. increased $93.5 billion to $ 2,797.2 billion, as transaction more than offset price depreciation in owners equity. The stock market index is adjusted to remove the effect or reinvested earnings on stock prices tom prevent double-counting of reinvested earnings in the formula.

Risk, Return, and Market Structure

Components of Comparison	Article from CRP	Article from student
Title	Extending the capital asset pricing model: the reward beta approach, by Graham Bornholt	Investment in New Enterprise: Some Empirical Observations on Risk, Return, and Market Structure
Topic	Risk, Return, and Market Efficiency	Emerge of new ventures
Theory used by article/ research	Fama And French (1992),  doubt about the validity of the CAPM. Fama And French (2004), CAPM,s empirical problems invalidate most of its current applications. Fama And French (1993), three factor model are receiving more attention in empirical research. Fama And French (1992), strong evidence for size and bok to market effects. Bawa and Lindenberg (1977), Kaplanski (2004), alternative mean risk asset pricing model by replacing the mean variance assumption with a specific mean risk assumption. Bornholt (2006), deriving a broad class of mean risk asset pricing models that includes the CAPM as a special case. Fama And French (1993), show increasing average excess return and decreasing CAPM betas as book to market equity increases. Fama And French (1992, 1993, 1995, 1996),if stock are price rationally, then size and book to market equity must proxy for underlying risk factors. Fama And French (1993),three factors to explain the cross section of stock expected return: - the excess return on a market portfolio - the difference between returns on small and large stocks - the difference between the returns on high and low book to market equity Fama And French (2004), the poor performance of the CAPM in explaining the cross section of average returns just adds to the already strong empirical evidence against the CAPM.	Institutional Investors Study Many years ago, worldwide, buyers and sellers of corporation stocks were individual investors, such as wealthy businessmen or families,who often had a vested, personal and emotional interest in the corporations whose shares they owned. Over time, markets have become largely institutionalized: buyers and sellers are largely institutions (e.g., pension funds, mutual funds, hedge funds, exchange-traded funds, other investor groups; insurance companies, banks, brokers, and other financial institutions). “not intended to represent actual gains realized by institutions in connection with venture capital investment or to suggest that such price change peculiarly within the expertince of institutional investors” Actual rates of returns on investment in new or very young companies made by three institutions that are prominent in the funding of such enterprises
Hypothesis of research	Impact of size and book to market effects on estimates of expected return. Alternative method for estimating expected returns. Reward beta approach performs well empirically and is based on asser pricing theory.	Most of the investment required more than one injections of capital, and some generated disbursements (dividends or loan repayment) Instant information flows, large numbers of buyers and sellers, high degress of asset divisibility, and homogenous expectattions are not present in the venture capital market.
Variables used in research	The reward beta approach (The Sharpe Lintner capital asset pricing model). Rf=the risk free rate Ri and Rm=random returns of security I and the market Βi= CAPM beta A version of the market model J= portfolio j Εj= a random error term Used in the cross section regression test, reward beta model. Empirical evaluation	Portofolios of the entire 110 venture investment sample Investment size range
Method of analysis	1. CAPM 2. Three factors model 3. Reward beta approach 1. Coefficient ofvariation 2. Trend adjusted 3. Trend forecast 4. Accounting beta	Alpha, beta, and R2 Measure rate of return net of estimated costs for all investment in the sample aggregated into a composite portofolio Tested the sensitivity of the composite performance to a few highly successful investment by computing rates of return for sa series simulated portofolios which the best performersd were successively eliminated. The numbert of investments required to provide adequate diversification then was explore by simulating sets of randomly-drawn portofolios.
Result of the analysis/ research ( Conclusion)	ü  Reward beta approach give better results by estimating more specialized models of expected returns. ü  Reward beta approach strongly supported by empirical evidence. ü  In contrast the reward beta approach is based on asset pricing theory and is strongly supported by empirical evidence reported. ü  These advantages make this approach a better choice across a range of applications.	Investment in new or young enterprise typically requires both staying power and willingnes on the part of the investor nto hold investment for longer period than would be the case of portofolio contains readily marketable assets. Investment size Variability of Individual Investment return aIn summary An attractive rate of return can be generated over time by well-diversified venture portofolios Adequate diversification requires greater minimal capital  levels than may be the case for portofolios containing securities of more mature entreprises with readily marketable securities.

Ownership, control, and compensation

Ownership, Control, and Compensation

#Journal 1

Title

Ownership structure, investment, and the corporate value: an empirical analysis

By Myeong-Hyeon Cho

Topic

The relation among ownership structure, investment, and corporate value, focusing whether ownership structure affect investment.

Theory used by article/ Research

Morck et al. (1988) and McConnell and Servaes (1990) find a non-linear relation between ownership structure and corporate value.

McConnell and Muscarella (1985): investment positively affects corporate value.

On average: the stock markets react positively to announcements of increases in planned capital expenditures and negatively decreases in planned capital expenditures.

Jensen and Meckling (1976) and Stulz (1988): ownership structure affects corporate value.

Ownership structure affects corporate value by its effect corporate value by its effect on investment.

Fazzari et al. (1988) present evidence that liquidity affects investment, emphasizing the importance asymmetric information problems and agency problems in investment financing decision.

Kole (1994)

Evidences of a reversal of causality in the ownership-corporate value relation, suggesting that corporate value could be a determinant of the ownership structure rather than being determined by ownership structure.

Hypothesis of Research

Ownership structure affects investment

Corporate value affects ownership structure but not the reverse, thereby reversing the interpretation of the relation between ownership structure and corporate value.

Ownership structure, investment and corporate value might be interdependent. That is ownership structure affects investment which, in turn, affect corporate value, again, affects ownership structure and so forth.

Variables used in research

1. ownership structure as exogenous
2. ownership structure, investment, and corporate value as endogenous

Method of analysis

Simultaneous equation regression

Ownership structure, investment, and corporate value are endogenously determined.

INV _i: α +β₁INS1_i + β₂INS2_i + β₃INS3_i + u_i

INV _{I :} investment level of firm

INS1_{i :} Insider ownership of the firm

Result of the analysis/ research (Conclusion)

In Simultaneous equation regression results: investment affects corporate value which, in turn, affects ownership structure, thereby reversing the interpretation of the results from OLS regression.

Investment affect ownership structure, but not the reverse suggests that ownership can’t be an effective incentive mechanism to induce managers to make the maximizing investment decisions.

#Journal 2

Title

ORGANIZATIONAL GOVERNANCE AND EMPLOYEE PAY: HOW OWNERSHIP STRUCTURE AFFECTS THE FIRM’S COMPENSATION STRATEGY

By Steve Werner, Henry L. Tosi, Luis Gomez-Mejia

Topic

Investigated how the ownership structure is related to the firm’s overall compensation strategy

Theory used by article/ Research

e.g. Hambrick and Finkelstein, 1995; Incentives alignment at the top is the lowest where it’s needed the most : when ownership dispersion is high.

It appears that when the upper management pay-setting discretion is not constrained by major shareholders, executives reduce their risk by decoupling pay from performance and instead link their pay criteria they can easily control (Kroll, Simmons, and Wright, 1990; Wright, Kroll, and Elenkov, 2002)

Rajagopalan, and Finkelstein (1992) argued that environmental complexity is associated with the use of riskier outcome based performance criteria to make pay decisions in order to minimize monitoring costs

Rajagopalan (1996) reports that highly performing prospector firmsd tend to rely on incentive compensation, which poses greater risk (since it is uncertain) but also greater upside potential ( as employees stand to gain if prospects turn out to be successful)

Instrumental approach to compensation strategy is very different from the parallel research on how ownership structure affects top management pay (where self-serving behavioral prejudicial to the organization often play the key role).

The one important factor to consider in explaining inter-firm differences in pay allocation criteria is ownership structure, with those firms where executives enjoy much discretion (i.e., under high ownership dispersion) preferring to adopt low-risk compensation strategy for the entire organization and vice versa when executives are closely monitored(i.e., under high ownership concentration.

Hypothesis of Research

1. Change in employee compensation levels will be related to changes in financial performance in owner –controlled firms, but not in management-controlled firms.
2. Changes in employee compensation levels will be related to changes in size in manager-controlled firms, but not in owner-controlled firms.

Variables used in research

• Firms were classified as Manager-Controlled (MC), Owner-Controlled (OC) or Owner-Managed (OM)

MC: those in which no individual or institution other than an employee benefit plan owns 5 percent or more of the firm’s outstanding voting stock.

OC: those in which at least 5 percent of the firm’s outstanding voting stock is in the hands of one individual or organization that was not involved in the actual management of the company or was not an employee benefit plan.

OM: those in which at least 5 percent of the firm’s outstanding voting stock is in the hands of one individual who was involved in the actual management  of the company.

• Stock Ownership
• Change in per capita pay level
• Change in firm size
• Change in performance
• Change in executive pay level
• Industry dummy variables ( were significant at p < 0.05)

Method of analysis

Correlation analysis

Used the entire population firms in COMPUSTAT that met the following criteria:

• Each firm had to report the total compensation expenses for all employees, ROA, number of employees, assets, and sales.

Resulted in a sample 4017 firms from 29 industries. The samples is not significantly different (p >0.05) in ROA, assets, sales, or number of employees than non-included firms that reported compensation data.

Result of the analysis/ research (Conclusion)

Pay/ performance sensitivity coefficients in OM firms are slightly less than those in OC firms, while the pay/ size sensitivity coefficients in OM firm are less than in MC firms.

OM firms having greater pay/ performance sensitivity than MC firms, but less than OC firms, while having greater pay/size sensitivity than OC firms but less than MC firms.

Finally the pay measures are rather coarse, aggregate indices that do not allow us to single out pay mix variables such as bonuses, benefits, and salary.