Ever wondered if there was any true benefit to hiring an overconfident CEO? Or whether having your company CEO on the board mattered to overall return on investment? Students investigate tunnelling in fraudulent Chinese firms, and put US stock selection skills under the microscope.
The 2015 New Zealand Financial Colloquium (NZFC) event had several categories of entry, with awards presented for the best in each. Following is an overview of the winning finance research for the 2015 event.
Winner – Best Paper in Capital Markets
The Determinants of CEO Board Membership
Michelle Li (University of Auckland) and Helen Roberts (University of Otago)
This research paper takes a closer look at the determining factors and performance implications of chief executive officer (CEO) board membership. In New Zealand, companies have a wide variety of CEO board membership, with around 70 per cent of companies having their CEOs on the board, and 30 per cent not.
The probability of CEO board membership is higher the larger and more complex the company, and when the board is less independent and more capable. There is also a self-selection bias. Once that effect was controlled for, firms with CEOs on the board outperform CEOs off the board in return on investment, but don’t differ widely in overall return on investment and market returns.
This indicates that having the CEO of a company on the board is advantageous. Another note was that CEO board membership performance benefits reduced after the introduction of the Best Practice Code in 2003.
Winner – Best Paper in Financial Regulation or Corporate Finance
Executive Confidence and New CEO Selection
Suman Banerjee (University of Wyoming), Lili Dai (Australian National University), Mark Humphrey-Jenner (University of New South Wales), Vikram Nanda, Rutgers University
This study investigates whether a senior executive’s confidence levels impact the likelihood of them being promoted to CEO. Research suggests that CEOs err on the side of overconfidence, and that in some circumstances, this can enhance a company’s performance. The researchers used an option-based overconfidence measure to show that over confident senior executives are more likely to be promoted. A company that is seeking a change in strategy (mature, low-risk companies) like to appoint over-confident executives, and benefit from improved corporate value and innovations in efficiency.
Promotion of an over-confident executive, however, doesn’t significantly impact company value when the company is less mature and riskier. Boards that are busy and target growth through acquisitions prefer over-confident executives too, though significant value-effects don’t exist.
Winner – PhD Symposium Award
New model and evidence of cash tunnelling in Chinese firms
Yi Wei, Jianguo Chen and Jing Chi, Massey University
This study takes a closer look at how shareholders tunnelled firm value from fraudulent Chinese companies between 1998 and 2010, and which situations were more likely to support controlling shareholders tunnelling. The results show that the higher the profitability of the firm, the lower the level of tunnelling; the higher the cost of tunnelling, the lower the tunnelling level; the higher the ownership of top shareholders, the lower the optimal tunnelling level.
Tunnelling is transferring company cash to the top owner’s personal bank account, setting up a loss for the company. Fraudulent owners typically choose a ‘soft’ account to record a vacant asset for the cash transfer, with the record maintained as long as possible. The account is easily manipulated, and discovery much harder during annual auditing.
Winner – Best Paper in Investing
Opening the Box on Stock Selection Skills in US Mutual Funds
Ron Bird, Veronica Sherwood and Danny Yeung, University of Technology, Sydney
This research paper uses the hit rate as a proxy for stock selection skills. The hit rate is the percentage of stocks in a fund’s portfolio that achieve a better return than the fund’s benchmark index fund over a specific time period. The results show that in the fund sample, the investors would have had a better hit rate by holding the stocks of the benchmark portfolio, with many fund manager decisions actually decreasing their realised hit rate. The hit rate at the same time is closely related to fund performance, and has some predictive power of future performance.
The New Zealand Finance Colloquium (NSFC) was set up in 1996 for the sole purpose of promoting the discussion and development of finance-related research in New Zealand. The annual event is held at universities across New Zealand, with research papers presented, and voted on.