This dissertation contains five research projects within the context of two distinctive issues that concern the effectiveness of executive compensation in aligning executive interests with shareholders and how institutional investors play a role in structuring corporate governance mechanisms. The objective of this dissertation is to first determine how institutions should exert their influence if they are serious about alleviating agency problems and improving firm performance. Second, the thesis seeks to determine whether institutional investors use their influence to shape executive compensation and corporate governance mechanisms in a manner consistent with aligning managerial interests with shareholders and increasing shareholder wealth. The thesis finds that CEOs with option incentives increase the likelihood that a firm will increase risk by undertaking both major real investments and acquisitions. Moreover, CEO option grants are positively related to measures of firm valuation and operating performance suggesting option incentives are an important mechanism to align CEO interests with shareholders. This is robust to alternative measures of firm valuation and operating performance, also various estimation techniques. Using these findings to motivate the direction of institutional influence on executive compensation, it is found that institutional investors, particularly smaller activist traders, significantly increase option grant incentives received by executives. Institutional influence also raises CEO pay which is consistent with preservation of reservation CEO utility levels. Addressing the role of institutional investors in the context of other corporate governance mechanisms, it is found that institutional investor influence is also negatively related to board size and positively related to board independence, which is achieved by removal of inside directors. Such actions are consistent with empirical studies that show smaller boards and increased levels of independent directors improve firm performance and board decision making. The main conclusion from this dissertation is that option incentives are an effective mechanism to align CEO interests with those of shareholders. Institutional investors appear to recognise this importance, and effectively use their influence to increase options received by executives. Combined with institutional investors putting in place corporate boards that provide better oversight of management, institutional investors appear to be effective monitors of the firms in which they invest.

This dissertation contains five research projects within the context of two distinctive issues that concern the effectiveness of executive compensation in aligning executive interests with shareholders and how institutional investors play a role in structuring corporate governance mechanisms. The objective of this dissertation is to first determine how institutions should exert their influence if they are serious about alleviating agency problems and improving firm performance. Second, the thesis seeks to determine whether institutional investors use their influence to shape executive compensation and corporate governance mechanisms in a manner consistent with aligning managerial interests with shareholders and increasing shareholder wealth. The thesis finds that CEOs with option incentives increase the likelihood that a firm will increase risk by undertaking both major real investments and acquisitions. Moreover, CEO option grants are positively related to measures of firm valuation and operating performance suggesting option incentives are an important mechanism to align CEO interests with shareholders. This is robust to alternative measures of firm valuation and operating performance, also various estimation techniques. Using these findings to motivate the direction of institutional influence on executive compensation, it is found that institutional investors, particularly smaller activist traders, significantly increase option grant incentives received by executives. Institutional influence also raises CEO pay which is consistent with preservation of reservation CEO utility levels. Addressing the role of institutional investors in the context of other corporate governance mechanisms, it is found that institutional investor influence is also negatively related to board size and positively related to board independence, which is achieved by removal of inside directors. Such actions are consistent with empirical studies that show smaller boards and increased levels of independent directors improve firm performance and board decision making. The main conclusion from this dissertation is that option incentives are an effective mechanism to align CEO interests with those of shareholders. Institutional investors appear to recognise this importance, and effectively use their influence to increase options received by executives. Combined with institutional investors putting in place corporate boards that provide better oversight of management, institutional investors appear to be effective monitors of the firms in which they invest.

Στη συγκεκριμένη διπλωματική εργασία θα αναλύσω τον ρόλο που παίζει η αστάθεια στην ευρύτερη χρηματιστηριακή αγορά, σε συνδυασμό με τους θεσμικούς επενδυτές. Δηλαδή θα αναλύσουμε κατά πόσο οι συναλλαγές των θεσμικών επενδυτών επηρεάζουν την αστάθεια που παρατηρείται στις αποδόσεις των δεικτών των χρηματιστηρίων. / In this desertation will analyze the rule to play the volatility in the stocks markets, in combination with the institutional investors. I analyze that how the trading of institutional investors affected the volatility of equity returns of index of stock markets.

This study consists of two essays. In the first essay, I examine whether the overlap in institutional investors between the supplier and its customer can be an efficient monitoring mechanism in the product market. Using a large sample of supplier–customer relationships for the period 1980–2011, I provide the following evidence. First, a high level of overlapping institutional ownership mitigates the adverse effect of asymmetric interdependence between supplier and customer on their firm performance. Second, relationship-specific investments and partnership duration are identified as underlying channels through which overlapping institutional ownership mitigates the adverse effect of asymmetric interdependence on partners’ performance. Third, overlapping institutional ownership is negatively associated with accounts receivable when the supplier is more financially constrained than the customer, suggesting that overlapping institutional ownership improves the efficiency of trade credit allocation. These findings survive out of a series of robustness checks. The findings of this study highlight that the overlap in institutional investors between supplier and customer plays as an efficient monitoring mechanism in the product market. In the second essay, I examine the informational role of overlapping transient institutional investors who hold stocks of both the firm and its customers in disseminating customer information to the firm’s bond market and document four findings. First, I find that overlapping transient institutional ownership significantly alleviates the prediction of lagged customer-portfolio bond returns to supplier bond returns even after controlling for the interaction effect between stock market and bond market. This finding survives out of a series of robustness checks. The alleviation effect is more pronounced for firms with high customer concentration and low customer industry competition, or with non-investment grade. Second, I find that overlapping transient institutional ownership represents more than a mere proxy for investor attention and leads to information advantage over overlapping institutional bondholders. Third, I find that current customer-portfolio return is significantly associated with the trading volume of overlapping transient institutional investors in the bond market, suggesting that overlapping transient institutional investors indeed take customer information into account when they trade bonds of suppliers. Fourth, I examine the real effect of customer information on bondholders and find that customer bond return is significantly related to the supplier’s future operating performance, which is an important predictor of credit risk. Overall, my results show that overlapping transient institutional shareholders take economically linked information into account when they trade in the bond market and improve the informativeness of bond price. Keywords: supplier–customer relationships, overlapping institutional investors, monitoring mechanism, bond price informativeness

Current real estate investment decision making frameworks fail to recognise differences posited by the retail sector. The investment decision stage concerned with forecasting expected returns relies on financial and quantitative models such as those derived from the Modern Portfolio Theory. In a shopping mall environment, however, future performance is driven by nonfinancial factors, for example tenant mix and superior customer experience. Therefore, forecasting expected returns in a retail environment requires a nuanced approach relative to other commercial property sectors. Using a Balanced Scorecard framework, this study investigated the usefulness of nonfinancial factors in forecasting expected returns in retail. An electronically administered survey using a sample of institutional investors that contributed to South Africa’s SAPOA/IPD Index for 2012 was conducted. Only officials occupying investment decision making positions were invited to participate in the survey. Nonfinancial factors identified from the literature were presented to the respondents on a Likert-Style scale. In aggregate, participants to the survey possessed 156 years of commercial property experience and 56 years of retail experience. Mean scores obtained from participants’ responses were used to analyse the research findings. The study found nonfinancial factors useful when forecasting expected returns in a retail investment decision environment. Further, the study suggested the use of a Balanced Scorecard framework in order to guide developments in the area of retail investment decisions. In conclusion, the study gave direction for future research in the retail sector. / Dissertation (MBA)--University of Pretoria, 2013. / zkgibs2014 / Gordon Institute of Business Science (GIBS) / MBA / Unrestricted

This study provides an insight into the behavior of foreign institutional investors in Swedish corporate governance matters. We look at the presence of foreign institutional investors on the Swedish nomination committee and their voting power, to show their influence on board independence in Sweden. Collecting data for two years that is 2018 and 2019, from Swedish firms listed on the Swedish stock exchange markets, and analyze the data using the panel regression analysis. The result shows that foreign institutional investors only influence board independence in Sweden when a controlling owner has more than 50 % of the voting right. Also, we show that foreign institutional investors generally have little or no influence on the number of independent directors on Swedish listed firms. However, it is the controlling owners and the board sizes that significantly determine the level of board independence in Sweden. This study concluded that for foreign institutional investors to influence board independence they should participate on the nomination committee.

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Yes / Our paper examines the distress anomaly on the Chinese stock markets. We show that the anomaly disappears after controlling for institutional ownership. We propose two hypotheses. The growing scale of institutional investors and changes in institutional preferences can generate greater demand shocks for stocks with low distress risk than those with high distress risk, causing the former to outperform the latter. Consistent with our hypotheses, the growth of institutions explains the anomaly when the institutional market share increases rapidly. We also show that institutional preferences for stocks with low distress risk have significantly increased over time and changes in preferences also explain the anomaly. Finally, momentum trading and gradual incorporation of distress information cannot account for the anomaly.

The dissertation consists of two essays. In the first essay, we measure herding by institutional investors in the new economy (internet) stocks during 1998-2001 by examining the changes in the quarterly institutional holdings of internet stocks relative to an average stock. More than 95% of the stocks that are examined are listed on NASDAQ. The second essay attempts to detect intra-day herding using two new measures in an average NYSE stock during 1998-2001. In the second essay, rather than asking whether institutional investors herd in a specific segment of the market, we endeavor to ask if herding occurs in an average stock across all categories of investors. The first essay analyzes herding in one of the largest bull runs in the history of U.S. equity markets. Instead of providing a corrective stabilizing force, banks, insurance firms, investment companies, investment advisors, university endowments, hedge funds, and internally managed pension funds participated in herds in the rise and to a lesser extent in the fall of new economy stocks. In contrast to previous research, we find strong evidence of herding by all categories of institutional investors across stocks of all sizes of companies, including the stocks of large companies, which are their preferred holdings. We present evidence that institutional investors herded into all performance categories of new economy stocks, and thus the documented herding cannot be explained by simple momentum-based trading. Institutional investors' buying exerted upward price pressure, and the reversal of excess returns in the subsequent quarter provides evidence that the herding was destabilizing and not based on information. The second essay attempts to detect herding in financial markets using a set of two methodologies based on runs test and dependence between interarrival trade times. Our first and the most important finding is that markets function efficiently and show no evidence of any meaningful herding in general. Second, herding seems to be confined to very small subset of small stocks. Third, dispersion of opinion among investors does not have much of impact on herding. Fourth, analysts' recommendations do not contribute to herding. Last, the limited amount of herding on price increase days seems to be destabilizing but on the price decrease days, the herding helps impound fundamental information into security prices thus making markets more efficient. Our results are consistent with Avery and Zemsky (1998) prediction that flexible financial asset prices prevent herding from arising. The seemingly contradictory results of the two essays can be reconciled based on the different sample of stocks, and the different methodologies of the two essays which are designed to detect different types of herding. In the first essay, herding is measured for NASDAQ-listed (primarily) internet stocks relative to an average stock, while the second essay documents herding for an average stock. In the first essay, we document herding in more volatile internet stocks, but we do not find any evidence of herding in more established NYSE stocks. The first essay examines herding by institutional investors, while the second essay examines herding, irrespective of the investor type. Consequently, in the first essay, we find that a subset of investors herd but in the second essay market as a whole does not exhibit any herding. Moreover, the first essay measures herding by examining the quarterly institutional holdings of internet stocks, while the second essay measures herding by examining the intra-day trading patterns for stocks. This suggests that it takes a while for investors to find out what others are doing leading to herding at quarterly interval but no herding is observed at intra-day level. The evidence presented in the two essays suggests that while institutional investors herded in the internet stocks during 1998-2001, there was very little herding by all investors in an average stock during this period. / Ph. D.

The first essay analyzes mutual funds proxy voting records on shareholder proposals. The results indicate that mutual funds support shareholder proposals and vote against management for proposals that are likely to increase shareholders wealth and rights, in firms with weaker external monitoring mechanisms, in firms with entrenched management, and when funds have longer investment horizon. Mutual funds mostly take management sides on executive compensation related proposals, when they have higher ownership concentration, and when they belong to bigger fund families. The results further indicate that there is a positive reputational effect for the funds undertaking a monitoring role. Moreover, mutual funds reduce holdings when they disapprove of managements policy, but before doing so they take on an activist role by supporting shareholder proposals. The second essay investigates institutional investors trading behavior of acquiring firm stocks surrounding merger activities. We label investment companies and independent investment advisors as active institutions and banks, nonbank trusts and insurance companies as passive institutions. We find active institutions increase holdings of acquiring firm stocks for mergers with higher wealth implications. However, active institutions overreact to stock mergers at the announcement, which they appear to correct at the resolution quarter of the merger. The trading behavior of passive institutions suggests that these institutions disregard the market response of merger announcement in trading acquiring firm stocks at the announcement quarter. The passive institutions gradually update their beliefs and trade on the basis of merger wealth effect at the resolution quarter. The third essay examines relation between executive compensation structure with the existing level and changes of takeover defense mechanisms of firms. According to managerial entrenchment hypothesis, higher managerial power from adoption of takeover defense mechanisms would lead to generating higher rents for executives. Efficient contracting hypothesis argue that higher anti-takeover provisions would contribute in achieving efficient contracting by deferring compensation into the future due to the low possibility of hostile takeover. The results support managerial entrenchment hypothesis with regard to existing level of takeover defense mechanisms. With regard to changes in anti-takeover provisions, the existing level of managerial power influence the future pay structure.