This thesis explores both theoretically and empirically how firms design employees’ compensation contracts to motivate them to work and to adapt to external changes under an informed principal framework. The first chapter analyzes how a principal, privately informed about the changing market condition, structures the agent’s incentive contract to inform and motivate her to adapt. The results show that a failure to overturn employees’ belief about the changing market condition could lead to insufficient adaptation. Further, a more pressing market condition induces earlier adaptation and greater information revelation. Finally, the compensation structure underpinning insufficient adaptation imposes a legacy problem due to excessive use of long-term incentives, which restrains the reconfiguration of the contract in place. Based on the first chapter, the second chapter aims to explain asymmetric contractual adjustment of CEO compensation, only upward but not downward. I argue that a principal, privately informed about the firm’s changing productive efficiency, uses contracts to provide the agent with not only working incentives but also information about her productivity. The principal commits to a back-loaded compensation plan with an increasing salary or with an increasing short-term performance pay. Such rigid contracts achieve greater efficiency by inducing more efforts from the agent through profit sharing. The third chapter, co-authored with Peggy Huang and Moqi Xu, finds CEO contracts explicitly account for subjective reviews in a new dataset of CEO contracts and stated reasons for compensation changes. Our results suggest that firms prefer to keep early R&D successes from the public and thus raise salaries for early R&D success not yet realized in performance measures. Consistent with this explanation, standalone salary increases predict better long-run portfolio and stock returns, but only following positive subjective evaluations and in firms with high R&D investment.

This thesis contains three essays on the linkages between financial markets and business cycles. The first chapter introduces a method to embed learning about asset prices (relying on past observation to predict future prices) into business cycle models in a way that retains a maximum of rationality and parsimony. This method is applied to a real business cycle model and a search model of unemployment. In the RBC model, learning about stock prices leads to counterfactual correlations between consumption, employment and investment. By contrast, the search model augmented by learning can generate realistic business cycle fluctuations. The volatility of unemployment in the data can be replicated without the need to rely on a high degree of wage rigidity. The second chapter examines the implications of a learning-based asset pricing theory for a model of firm financial frictions. Learning greatly improves asset price properties such as return volatility and predictability. In combination with financial frictions, a powerful feedback loop emerges between beliefs, stock prices and real activity, leading to substantial amplification of shocks. The model-implied subjective expectations are found to be consistent with patterns of forecast error predictability in survey data. A reaction of monetary policy to asset prices stabilises expectations and substantially improves welfare, which is not the case under rational expectations. The third chapter is concerned with the inefficiencies caused by incomplete national and international financial markets. Specifically, it examines the optimal design of an unemployment insurance scheme that operates across multiple countries in the presence of such inefficiencies. Using a two-country business cycle model with labour market search frictions, it is found that a supranational unemployment insurance scheme can be used to achieve transfers across countries without changing unemployment levels; and that the optimal unemployment insurance policy prescribes a countercyclical replacement rate due in the presence of cross-country transfers.

This thesis contributes to the existing literature on market microstructure by presenting three essays on the market microstructure around ex-dividend days. The first essay studies the market microstructure “footprints” associated with trading and tax-arbitrage activity around ex-dividend day using a sample of FTSE 100 stocks. Specifically, the first essay asks whether bid-ask spreads, price volatility and order submission strategies change as stocks transition to the ex-dividend day. From the results there is evidence of the presence of both tax- arbitrageurs and liquidity suppliers around ex-dividend day. Furthermore, the findings support that increases in spread, volatility, return and execution probability around ex-dividend day attract liquidity suppliers and tax-arbitrageurs. The second essay investigates whether the lack of liquidity prevents the presence of ex-dividend trade activities, and how the behaviour of tax-arbitrage traders, if there are any, could affect bid-ask spreads, price volatility and order submission strategies using a sample of FTSE SmallCap stocks. The results show that illiquidity seems not to prevent tax-arbitrage activities altogether. Although, the findings suggest effects associating order submission to spread, volatility and to return, they do not support any effect associating order submission to execution probability. The third and final essay analyses intraday patterns related to bid-ask spread, trade volume and price volatility around the ex-dividend day for a sample of FTSE 100 companies. The results show that volume towards the end of the trading day is .greater .both on ex- and cum-dividend days, among firms that are the most attractive targets for tax-arbitrage. The findings show that the spread towards the end of the day is greater both on ex-dividend and cum-dividend days also though here the effect is confined to the last half hour of the trading day for the firms that are the most attractive targets for tax-arbitrage. The classification of whether a firm is an attractive target for tax-arbitrage is based on whether the price impact less than a specified threshold. Finally, the results and patterns noted above become masked in the large pool comprising all firms because the effects that are identified for firms that are the most attractive targets for tax-arbitrage are offset by the effects that are identified for the firms that are the least attractive targets for tax arbitrage.

Cette thèse explore de nouvelles approches pour développer des modèles de prédiction de la faillite. Elle contient alors trois nouveaux domaines d'intervention. La première est une nouvelle variable explicative basée sur la gestion des résultats. À cette fin, nous utilisons deux mesures (accruals et activités réelles) qui évaluent la manipulation potentielle des bénéfices. Nous avons mis en évidence que les modèles qui incluent cette nouvelle variable en combinaison avec des informations financières sont plus précis que ceux qui dépendent uniquement de données financières. La seconde analyse la capacité des modèles de faillite d'entreprise dans des ensembles de données déséquilibrés. Nous avons mis en relation les différents degrés de déséquilibre, la perte de performance et la capacité de récupération de performance, qui n'ont jamais été étudiés dans les modèles de prédiction de la faillite. Le troisième unifie les domaines précédents en évaluant la capacité de notre modèle de gestion des résultats proposé dans des ensembles de données déséquilibrés. Les recherches abordées dans cette thèse fournissent des contributions uniques et pertinentes à la littérature sur les finances d'entreprise, en particulier dans le domaine de la prédiction de la faillite. / This dissertation explores novel approaches to develop corporate failure prediction models. This thesis then contains three new areas for intervention. The first is a novel explanatory variable based on earnings management. For this purpose, we use two measures (accruals and real activities) that assess potential earnings manipulation. We evidenced that models which include this novel variable in combination with financial information are more accurate than those relying only on financial data. The second analyzes the capacity of corporate failure models in imbalanced datasets. We put into relation the different degrees of imbalance, the loss on performance and the performance recovery capacity, which have never been studied in corporate failure. The third unifies the previous areas by evaluating the capacity of our proposed earnings management model in imbalanced datasets. Researches covered in this thesis provide unique and relevant contributions to corporate finance literature, especially to corporate failure domain.

This empirical study explores the effect of individual board attributes and combination of board attributes on managerial risk-taking in UK FTSE 350 firms. The recent financial crisis has focused the attention of regulators and all stakeholders of the firm on avoiding high risk-taking by top management. These concerns have been addressed in this study which examines the effect of board composition (board size, proportion of non-executive directors, and gender diversity), board leadership structure (presence of a powerful CEO and board executive ownership), board characteristics (age and tenure of board members) and board processes (board meeting attendance and frequency of audit committee meetings) on firm risk. This study aims to fill the gap in UK governance literature on how individual board attributes and a combination of board attributes (represented by the board composition index, the board leadership index, the board characteristics index and the board process index) associate with risk-taking in large UK corporations. Archival data is used in this study from a panel sample of 268 listed firms on the FTSE 350, over the period 2005 to 2010. On analysing the data, this study finds support for the hypothesis that a large board size decreases firm risk. The board composition index is found to be significantly negatively related to firm risk. A powerful CEO and executive director’s equity ownership is positively related to firm risk, and as expected the board leadership index is found to be significantly and positively associated with firm risk. Older board members with longer tenures reduce firm risk; and the board characteristics index is significantly and negatively related to firm risk. Better board meeting attendance and more frequent audit committee meetings reduces firm risk and as expected the board process index reduces firm risk. An overall board index constructed by combining the indices discussed above is found to be significantly associated with firm risk. This board index can be used as a board governance index to evaluate the effectiveness of the board in relation to firm risk. These findings can inform firms, investors and regulators that board attributes significantly affect firm risk and can be used as risk control mechanisms.

Capital budgeting is crucial in order for companies to sustain themselves, survive and flourish in markets and to increase shareholders' wealth. Nonetheless, decisions on capital budgeting are critical owing to the influence of uncertainty factors and dramatic changes in the environment milieu. Capital budgeting practices vary from country to country, from company to company and from project to project. Although many studies have been conducted in developed countries, there is a dearth of studies in emerging economies. Therefore, aims of this study were to investigate the prevalent choice of capital budgeting practices and influences of firms' characteristics on their choice based on Sri Lankan emerging market, identifying uncertainty factors and its influence on use of capital budgeting practices and explore the interacting effect of uncertainty factors between capital budgeting practices and performance, and finally, develop a capital budgeting model that would meld with the core components of uncertainty, firms' characteristics and firms' performance based on Sri Lankan market. The data for this study were garnered from primary data and secondary data collections. The primary data were collected from 186 CFOs working in companies listed on the Colombo Stock Exchange using self-administered questionnaires. The questionnaire was piloted with a sample of five CFOs. The secondary data were mainly collected from CSE via the Bloomberg website/annual reports. After the data were collected, they were analysed using multivariate analysis such as factor analysis, confirmatory factor analysis and structural equation modelling. This study revealed that the most popular capital budgeting technique used in Sri Lanka was NPV, followed by IRR, PB, ARR and DPB. As for capital budgeting tools incorporating risk, the most preferred method among Sri Lankan firms was uncertainty absorption in cash flows, followed by sensitivity analysis, probability analysis, scenario analysis, and adjusting the required return. Moreover, this study found that the most popular method for calculating cost of equity was the CAPM model followed by average historical returns on common stock. Emerging real options are at an embryonic stage in Sri Lanka. The use of naive capital budgeting practices was mostly preferred by small firms and mainly managed by CFOs with non-MBA educational qualifications and a short tenure. Sophisticated and advanced capital budgeting practices were used mostly by large firms; these were mainly managed by MBA qualified CFOs with a long tenure. As for industry differences, ARR was primarily applied by non-MBA CFOs and was also preferred by non-manufacturing firms. None of the other methods made any significant differences in terms of type of industry. This study found four new levels uncertainty: operational uncertainties (input, labour and production), financial uncertainties (interest rate, inflation and exchange rate), social uncertainty (policy, political and social) and market uncertainty (competitive, output market and input market). Apropos of the model, sophisticated capital budgeting practices were determined by the size of the capital budget, market uncertainty and financial uncertainty. Advanced capital budgeting practices were determined by the size of the capital budget, the educational qualifications of the CFOs, operational uncertainty and "~'U"''''lal uncertainty. In a similar vein, naive capital budgeting practices were determined by the size of the capital budget, the educational qualifications of the CFOs, industry and financial uncertainty. Moreover, this study found that social uncertainty moderates the relationship: between advanced capital budgeting practices and effectiveness, between sophisticated capital budgeting practices and Tobin_q and between advanced capital budgeting practices and Tobin_q. Overall, this study has made theoretical contribution as melding with uncertainty factors with capital budgeting practices, geographical contribution as investigated the prevalent capital budgeting practices in Sri Lankan emerging market and parametric contributions as identified firm characteristics and uncertainty factors on the choice of capital budgeting practices and consequence influence on firm performances. The directions for future research are clearly discussed. In a nutshell, beyond its valuable contribution, this study serves as a springboard for future research.

The proliferation of the corporate form has resulted in a state of dependency by the economy on the companies operating within it. These companies require the free flow of capital for investment, growth, and avoidance of precipitate insolvency. For over a century, the floating charge has played a cardinal role in the provision of credit to companies in the UK. Over the same period, the charge has undergone several statutory interventions raising doubts as to the ability of financiers to rely on the charge as a basis for extending and securing credit. This thesis explores the impact of some of these changes on lending practices and insolvency outcomes. The changes examined primarily relate to the redistribution of floating charge assets in favour of other creditors in insolvency. The thesis uses analytical and empirical research methods. There are six chapters in the thesis. Chapters 1 and 2 provide a commercial background to the study and identify the research question; they explore the impact of companies on the economy, and the importance of credit and security. Chapter 3 contains an empirical account of the impact that the treatment of the floating charge in insolvency has on lending practices and insolvency outcomes. Chapter 4 examines the interest conferred by a floating charge against current inroads into the rights of a floating chargee. Chapter 5 scrutinises the raison d’être for redistributing floating charge assets. Chapter 6 concludes the thesis by providing analytical commentary on proposals regarding the future of the floating charge and factoring. This is followed by a Postscript which summarises the arguments and evidence contained in the thesis, and sets out a number of recommendations. The thesis will show that the floating charge is still used in corporate finance transactions. Proposals to unify company security interests would not affect this. However there are noticeable alterations in lending practices, partly devised as a response to the treatment of the floating charge. These alterations sometimes have adverse effects on insolvency outcomes. Overall, it argues that the treatment of the floating charge lacks sound justification, and, in certain respects, fails in its objectives.

The purpose of this study is to examine how broad changes in the global business environment, in general, and developments in the Omani business environment, more specifically, are impacting upon the management accounting practices (MAPs) that are used by non-oil-related Omani manufacturing companies (NOROMC). The importance of NOROMC in Oman has increased over the last three decades, as the country's leaders strategically shift away from over-dependence on revenues generated by oil-related manufacturing companies. The research in this thesis is qualitative, and it is informed by complementary socio-political theoretical frameworks - including Burns and Scapens (2000) conceptualisation of management accounting (MA, hereafter) change using institutional theory, and Hardy’s (1996) notion of power and political mobilisation. The empirical work comprises an in-depth case study, but is also preceded by a survey and follow-up interviews that have more generally explored the management accounting practices adopted by NOROMCs. First, the survey results, reinforced also by the follow-up interviews, have indicated that a majority of NOROMCs adopt traditional MAPs, rather than more contemporary MAPs. The most frequently cited reasons for the non-adoption of contemporary MAPs included: lack of affordability, incomplete knowledge, and a perception of relative efficiency in traditional MAPs. However, in terms of those companies which did adopt newer MAPs, the most common response in relation to what drives the adoption of newer MAPs, included: compliance with parent company requirements and regulations, and, more generally, the changing business environment. Having attained these results from the survey and follow-up interviews, it was felt that there was insufficient detail and understanding of the processes of new MAPs’ (non-) adoption. A case study was therefore also undertaken, to provide useful and in-depth understanding. This case study provides new insight into the process of the (non-) adoption of contemporary MAPs in NOROMCs which, in turn, supplements, but also extends, previous research, which is mostly based on questionnaire-style methods. The case study also reveals complexity in employee resistance, and highlights some of the cultural nuances that are related to the Omani setting. This thesis was undertaken in the context of recent calls for further research into MA as a changing process in emerging economies (Hopper et al., 2009). As far as the author is aware, this investigation is the first of its kind to be conducted in Oman, hence it should instantly contribute to the development of knowledge in this important area.

Ce travail de recherche vise à explorer la relation entre deux mesures de performance: l’efficience technique par la méthode d’enveloppement des données (DEA) et les rentabilités financières. Toutes deux relèvent de modélisations distinctes de l’entreprise et de son environnement mais s’accordent sur la typologie des facteurs susceptibles d’affecter la performance. Chacune propose un cadre d’analyse permettant leurs différenciations en facteurs déterministes exogènes d’une part et en facteurs endogènes relevant de la volonté stratégique de la firme ou d’attributs spécifiques d’autre part. Par le biais d’une application au secteur du transport civil aérien américain sur la période 1990-2012, la thèse met en évidence l’existence d’une relation statistique entre efficience technique, mesurée par la méthode DEA, et rentabilités. Nous observons que l’efficience technique, calculée sur la base des rapports officiels du Département du Transport Américain (US DOT), complète l’information comptable dans la valorisation des entreprises. En outre, la décomposition Hicks-Moorsteen et Färe-Primont de la productivité totale indique que les changements d’efficience technique sont associés aux rentabilités spécifiques. En revanche, les variations de la productivité issues de facteurs technologiques sont associées aux facteurs de risque systémique spécifiés par le modèle Fama-French-Carhart. La persistance de l’efficience technique au cours des cinq périodes consécutives suggère que l’amélioration de l’efficience entraine une réduction du risque systémique reflétée par la réduction du coût des fonds propres exigés. / This investigation explores the relation between two performance measures: technical efficiency and stock returns. Technical efficiency and stock returns are complementary measures. While the abnormal returns - that is to say, the diffrence between the expected and the realized returns - measures the ability of the management at picking investment projects effiently, technical efficiency focuses on the management ability at implementing these investment projects. In addition, both recognize that the performance of the firm ensues from the exposure to common exogenous factors and from the management strategy specific to each firm. They propose in both cases a decomposition of the performance in pure managerial effects and exogenous effects. Through an application on the US airline industry over the period 1990-2012, the study reveals the value relevance of technical efficiency in stock valuation. In addition, the analysis of the Total Factor Productivity (TFP) decompositions based on Hicks-Moorsteen and Färe-Primont indicates that the effect of efficiency information on returns is twofold. First, the changes in pure technical effiency are related to the firms-specific returns. Next, technological change is associated with the variance of returns explained by systemic risks estimated with the Fama-French-Carhart model. Moreover, technological change is positively related to stock returns, while technical efficiency is negatively related. Given technical efficiency is persistent over the five consecutive years, results suggest that improvements in technical efficiency imply the reduction in the firm’s exposure to systematic risk. It results a reduction in the firms’ required rate of returns.

This study investigates the association between earnings management and executive compensation by examining evidence from firms in the FTSE350 Index. It questions whether CEOs manipulate earnings, particularly with regard to bonus entitlement and discusses the possible reasons for their actions. It explores whther earnings are manipulated in self-interest to reach pre-specified bonus levels and increase compensation. It also examines the extent of manipulation when bonuses are deffered or when long-term compensation is offered, The effect of non-financial measures in assessing performance is also examined, when they are used alongisde financial meaures and when giving equal or more weight. There are many studies concerning earnings management (hereafter, EM) and executive compensation, particularly in the US, but accruals management has mostly been used to determine the extent of manipulation and real activities management has received comparatively little attention. The present study uses both discretionary accruals (hereafter, DAC) and real activities management (hereafter, RAM) which gives wider understanding of the issue. The findings reveal that executives indulge in income-increasing earnings management through DAC and adjusting sales when company earnings approach their pre-specified minimum and target bonus levels. It is also found that executives employ income-decreasing earnings management by adjusting DAC and sales when earnings approach their pre-specified maximum bonus levels. When a deferred bonus is equal to or greater than the annual bonus, results reveal that firms engage in less income-increasing manipulation than those with less deffered bonus. In a situation where the proportion of long-term bonus is greater than short-term bonus, less income-increasing earnings management are exhibited in terms of both DAC and RAM. The use of non-financial performance measures in bonus contracts also can have a significant effect on constraining EM. The results of the present study reveal that when both financial and non-financial performance measures are used together, less income-increasing manipulation by DAC and expenses takes place. If equal or more weight is given to non-financial performance measure compared with financial measures, minimal EM takes place both in DAC and RAM. This study cotnrols for corporate governance variables particularly related to executive compensation to assess their influence on EM. Despit increasing regulation designed to restrict manipulation of company results, the results show that stronger corporate governance rules have a minimal effect in controlling earnings management. A major contribution of this study is that it concludes that although RAM is not widely used it has great importance in relation to executive compensation. DAC is relatively easily identified and executives may avoid detection by adopting RAM. This suggests that tests for RAM should be more extensively used. Another unique feature of this study is that the effectiveness of deferred bonus in controlling EM has not to the best of my knowledge been previously examined. Whilst other researchers have concentrated on the relationship between stock options and EM, this research additionally takes into account other forms of long-term incentive such as share incentive plan, company incentive plan etc. Another important consideration, largely unexplored by previous researchers, is the advantage of using non-financial performance measures as well as financial performance measures and the degree of weighting given to both when determining pay and bonuses. Shareholders and other stakeholders expect pay to be limked to performance by incentives relating reward to increased company earnings and the choice of performance measures is important to achieve this. The findings of this study will be of interest to shareholders and regulators because it will assis them in undertanding how compensation characteristics are related to EM.