M.Comm. (Financial Management) / At the University of Johannesburg (UJ), the subject financial management is taught on various programmes across various disciplines. Lecturers find many students struggling with this subject and particularly with applying their knowledge to practical scenarios. If the problem (practical scenario) is not similar to a scenario previously encountered, many students struggle to solve these problems by themselves. This article will attempt to identify and explain key principles that need to be considered by lecturers in order to improve the problem-solving performance of their students in financial management. Most aspects identified and elaborated on lie within the field of educational psychology. This article will attempt to create an awareness of the key underlying principles of a problem-based pedagogy.

Risk can be defined as the volatility of unexpected outcomes, generally for values of assets and liabilities. Financial risk, risk refer to possible losses in financial markets, includes markets risk, credit risk, liquidity risk, operational risk, and legal risk. This MPhil thesis is specializing on market risk, which involves the uncertainty of earnings or losses resulting from changes in market conditions such as asset prices, interest rates, and market liquidity. The primary tool to evaluate market risk is VaR that is a method of assessing risk through standard statistical techniques. VaR is defined a measure for the worst expected loss over a given time interval under normal market conditions at a given confidence level. The greatest benefit of VaR for an asset manager lies in the imposition of a structured methodology for critically thinking about risk. Institutions applying VaR are forced to confront their exposure to market risk. There are three methods to calculate VaR, parametric, nonparametric and semi-parametric. Parametric method includes The Equally Weighted Moving Average (EqWMA), The Exponentially Weighted Moving Average (EWMA), GARCH, Monte Carlo Simulation (MCS) approaches. Parametric method includes The Historical Simulation approach (HS), and semi-parametric method includes filtered historical simulation (FHS), extreme value theory (EVT) approaches. At present stage, Chinese asset managers apply RiskMetrics approach, i.e. EWMA, proposed by J.P. Morgan to calculate VaR. But this approach assumes that error term is conditionally normally distributed. However, there has been criticism that the VaR is based on assumptions that do not hold in times when the financial markets are experiencing stress, and that the normal distribution does not make a good job in predicting the distribution of outcomes. Financial returns experience fat tails, skewness and kurtosis, which implies that the normal distribution works well in predicting frequent outcomes but is not a good estimator to predict extreme events. In addition, when applying EWMA approach, Chinese asset managers often use the decay factor proposed by J.P. Morgan instead of obtaining it on the basis of China’s financial markets’ data. The purpose of this MPhil thesis is to compare the applicability of different parametric VaR methods for Chinese equity portfolios. We will also analyze whether equity market cap has any impact on the VaR methods. To assess whether VaR can be considered as a reliable and stable risk measurement tool for Chinese equity portfolios, we have performed an empirical study. The study covers four VaR approaches at the 95% and 99% confidence levels. Moreover, in order to describe skewness and kurtosis, we propose EWMA approach with a mixture of normal distributions. Based on these results we discuss the implications of VaR for asset managers. Our conclusion is that GARCH-normal is superior to Riskmetrics approach at both 95% and 99% confidence levels. The LOG-MLE (maximum Likelihood Estimation) can be improved when GARCH-t approach is used to replace GARCH-normal. However, GARCH-t is more conservative than GARCH-normal at 95% confidence level. At the same time, EWMA with mixed normal distributions is superior to RiskMetrics approach at 99% confidence level, but it is too conservative at 95% confidence level. For EWMA with mixed normal distributions and GARCH-type models, the former is better at 99% confidence level and the latter perform better at 95% confidence level. Due to this fact we recommend EWMA with mixed normal distributions and GARCH-t at 99% confidence level. The performance of GARCH-normal and EWMA is fairly good at 95% confidence level.

Since 2001, publicly listed companies in China have been required by the Chinese Securities and Regulatory Commission (CSRC), the Shanghai Exchange and the Shenzhen Exchange to issue management earnings forecasts when they anticipate that earnings will be negative or change substantially from the previous period. This study examines the consequences and implications of this disclosure regulation. I find that the earnings forecasts are associated with an earlier incorporation of relevant earnings information into stock prices. However, I also find evidence that is consistent with the presence of overreactions to forecasts of extreme earnings changes. My study offers a cautionary note about the policy of mandating listed firms to issue earnings forecasts in a stock market that is dominated by individual investors.

Agency theory suggests that institutional stockholders are able to influence the dividend policies of listed firms with the underlying objective of reducing a firm’s agency costs. This study explores the causal effects of institutional ownership on dividend policies for the firms listed in China. Using various measures of institutional ownership and dividend policy, I find that mutual fund ownership in a firm causes it to pay out more cash dividends or to initiate cash dividends. These effects are mainly evident in the firms controlled by the state and regional governments and those with relatively high free cash flows. The effects are also shown to be stronger when the mutual fund investment horizon is longer. However, firms with existing high levels of cash dividends do not attract mutual fund investors. The results still hold when I use different methods to mitigate the endogeneity problem. Mutual fund ownership is also shown to reduce agency costs and improve the operating performances of the firms that they invest in. Other institutional investors, such as banks, insurance companies, and securities companies appear to have different influences from those of mutual funds on firms’ cash dividend payments, agency costs and operating performances. My results support the agency costs explanation of institutional ownership and dividend policy.

The adverse selection and agency cost theories suggest that the informational transparency of a firm can help to reduce over- or under-investment. This thesis examines how information asymmetry influences firm-level investment efficiency for companies listed in the U.S. market from 1993 to 2009. Information asymmetry is measured by the dispersion and error of the earnings forecasts made by financial analysts. I investigate how information asymmetry affects firms’ proneness to overor under-invest and the firms’ deviations from the investment levels predicted by investment opportunities. To be consistent with the prior literature, I also use the volatility of daily stock returns and yearly high-low price spreads derived from daily stock trading as alternative proxies of information asymmetry. The results show that lower information asymmetry is associated with more efficient investment. Specifically, a good information environment reduces capital investment for firms that are more prone to over-invest and increases capital investment for those that are more prone to under-invest. In addition, lower information asymmetry is also negatively associated with firm investment when the firm is over-investing and is positively associated with firm investment when the firm is under-investing The results are robust across different regression methodologies and to different estimates of the variables. My findings are consistent with the agency theories of adverse selection and principal-agent conflict.

My thesis examines whether corporate accessibility for minority shareholders, defined as the ease with which minority shareholders are able to contact corporate insiders, can be a signal of the severity of a firm’s agency problems. Using Chinese public listed firms as the testing group, I find that accessible firms are associated with less serious agency problems than is the case for non-accessible firms. Specifically, accessible firms tend to be associated with lower agency costs, lower cost of equity, higher firm valuation, and better operating performance. I also find that accessibility can signal agency problems in firms with different ownership and corporate governance structures, though the signaling effects are weaker in the firms where the incentives of insiders are tied less closely to stock price performance. Overall, my results indicate that corporate accessibility for minority shareholders is a value-relevant signal for investors to detect the quality of the publicly listed firms in China.

Using a dataset consisting of complete bid information for 477 bookbuilt IPOs that took place during Nov 2010 to Oct 2012 in China, I examine whether the performance of institutional investors demonstrates persistence in the IPO market. Building on the adverse selection model as developed by Rock (1986) and a twoperiod analysis, I develop three hypotheses and obtain empirical results that are consistent with the hypotheses. Firstly, I find that the performance of institutional investors continues into the next period. Secondly, I find that the performance persistence exists only for the investors with good past performance but not for investors with bad past performance. Finally, an index capturing the past performance of institutional investors is shown to be informative about the IPO’s initial and medium-term post-market returns. Overall, the results are consistent with the existence of performance persistence among the institutional investors. I conduct additional tests to trace the roots of the observed performance persistence. Results support the hypothesis that institutional investors with good past performance are relatively more informed than those with bad past performance. Specifically, investors with good past performance are more likely to participate in issues with high underpricing, exhibit stronger bid shaving ability, provide more information in terms of high elasticity of demand curve, and show a weaker tendency of naïve reinforcement learning. The results are robust after controlling for the influence of underwriters and after ruling out different alternative explanations. Taking all the results together, my study provides the first systematic evidence on the performance persistence of institutional investors in the IPO market. The results provide important insights for understanding the role of institutional investors in the IPO process and have implications for the design of IPO methods.

This study investigates both the direct and indirect roles of credit ratings (CR) on the capital structures of 1,513 firms operating in 19 countries with different financial orientations and levels of economic development over the 20-year period (1991-2010). Until recently, it has been common place to classify countries into capital market-based oriented (MB) and bank-based oriented (BB) in terms of their financial systems’ orientation (Antoniou et al. 2008). Traditionally, in MB economies (Australia, Canada, Hong Kong, South Korea, Mexico, the Netherlands, Sweden, Switzerland, Thailand, the U.K., and the U.S.) having a CR helps firms issue equity or bonds. In contrast, in BB economies (France, Germany, India, Indonesia, Italy, Japan, Russia, and Spain), companies tend to obtain loans from banks with which they maintain a long-term relationship. The creditworthiness of the firms is thus assessed by banks without much need for external CR. I find that the CRs’ impact on a capital structure is more significant and negative in countries with more MB oriented financial systems when quantified by the Financial Architecture variable (measuring the size, activity and efficiency of a stock market vis–à–vis the banking system of country annually), but not by the traditional division into MB and BB countries. This is consistent with the pecking order theory and information role of CRs in issuing equity, as well as the evidence of a rapid development of stock markets in many BB countries, which dulls the distinction between the traditionally defined MB and BB economies. Furthermore, the relation between the CRs and firms’ leverage ratio is significantly stronger for companies operating in advanced countries than companies operating in developing economies. Moreover, my analysis shows that CRs play more significant role in the U.S. than in other countries. In addition, I find that companies with poorer CRs display a faster speed of adjustment towards a desired level of gearing. This phenomenon takes place regardless of financial orientation or economic development of a country and can be linked with a different degree of financial constraints across differently rated firms.

It is well known that prudence plays an important role in the process of decision making under uncertainties. However, how prudence affects a bank's decision on extending fixed rate or variable rate loan has not yet been fully examined. In this dissertation, I use definition of second-order expectation dependence to further identify conditions for the risk prudent (imprudent) bank under state-dependent framework to refrain from extending fixed rate loans. Furthermore, using a set of actual data, I apply a recent developed inference procedure for testing positive expectation dependence to demonstrate the significance of my work in empirical applications. In the end, a non-parametric calibration is conducted and the result is highly consistent with the prevalence of banks that have preference for adjustable rate mortgage in U.S. 30-year prime mortgage market.

Since 2000, China has required publicly listed firms to issue management earnings forecasts when they expect extreme changes in earnings or are likely to become loss-making. This study examines managers’ forecast decisions under this unique regulatory environment. I find an increase over time in the proportion of firms issuing voluntary earnings forecasts when they do not expect extreme changes in their earnings or losses. I also find an improvement in the quality—in terms of the precision, accuracy and bias—of both mandatory and voluntary forecasts over time. Further detailed analysis shows that the introduction of the regulation on management earnings forecasts is one of the underlying forces driving firms’ decisions to provide voluntary earnings forecasts. Specifically, I find that a firm is more likely to issue a voluntary forecast if the firm was required by regulation to issue an earnings forecast in the previous year. Peer pressure also explains firms’ decisions to issue voluntary forecasts. I then investigate the reasons underlying the improvement in the quality of management earnings forecasts. I find that learning effects and peer pressure are the driving forces behind the improvement. Specifically, I find that the forecasts issued by more experienced firms are more specific, accurate and conservative. Furthermore, the quality of a firm’s forecast is positively related to the quality of its peer firms. Overall, my results show that requiring some listed firms to issue management earnings forecasts in China might have built up a momentum that has promoted the issuance of voluntary forecasts and improved the quality of forecasts over time.