Ethics Audits and Corporate Governance: The Case of Public Sector Sports Organizations

The journal that I acquired from Proquest discusses about the audits of ethics and corporate governance in public sports organization. The main difference from the CRP is the subject of CRP is social audits while the Proquest journal has ethics audits as its subject. Below are the comparisons:

Title

CRP: Identification of Role of Social Audit by Stakeholders as Accountability Tool in Good Governance

Journal: Ethics Audits and Corporate Governance: The Case of Public Sector Sports Organizations

Topic

CRP: Social Audits and Good Corporate Governance

Journal: Ethics Audits and Good Corporate Governance

Theory used

CRP

• Accountability gives sanctity to power and makes it more meaningful and relevant in the scheme of governance. (Kumar, 2000)
• Accountability is a term that requires many specifications, namely whose accountability to whom and how. (Liberator, 2004)
• Social auditing provides an assessment of the impact of an organization’s non-financial objectives through systematically and regularly monitoring its performance and the views of its stakeholders. (Boys, 2005)
• Social audit is an exercise developed in response to this need and requirement where people are involved in assuring the performance and effectiveness. (Kessler et al., 1992)
• The guiding principles for local development are sustainability, a participatory approach, gender equity, good governance, decentralization, and human rights. (Jain S. P. and Wim Polman, 2003)

Journal

• Sports have provided a very fertile ground for the exploration of both the social scientific investigations of ethically problematic issues. (Tomlinson and Fleming, 1997)
• In sports, philosopher and social scientists have often been concerned with ethical discussion of individual behaviors such as the in/defensibility of “diving” in football or what rights children have in relation to coaches. (Brackenridge, 2001; Dubois, 1986)
• At a societal level there are other issues that shape the culture or moral atmosphere of sports – for instance, the un/acceptability of practices such as using performance enhancing supplements (Hoberman, 1992), the use of generic engineering (Miah, 2000), the intimidation of sports officials (Thomson, 1998), and harassment by coaches (Kirby et al., 2000)
• The institutions of sports that are charged with its governance have responsibilities for the good health of sports in moral and/or financial matters. (Houlihan, 1999)
• Ethics audit should be limited to an evaluation of the implementation of an organization’s code of conduct. (DuFrene, 2001; Gray, 1996)
• Individual or personal values shape the way that individuals experience the organization as employees. (DeSensi and Rosenberg, 1996)

Hypothesis

CRP: The social audit supports stability and reliability of ethical and environmental performance.

Journal: Ethics audit should proceed on a rational and relatively objective basis to create an effective corporate governance of a sports organization.

Variables used in research

CRP

• Reliability
• Validity
• Performance

Journal

• Respect
• Equity
• Responsibility

Method of analysis

CRP

• Test-Retest reliability
• Questionnaire
• Likert scale

Journal

• Interviews

Conclusion

CRP: High reliability and validity of the instrument developed on positive statement establishes the appropriateness of the tool designed for assessing the role of social audit and its likely benefits and utility to stakeholders.

Journal: In order to develop into a more ethically sound organizational culture, all personnel within sports organization must make a commitment to improvement in whatever particular form that takes.

Fears of Foreign Ownership: The Old Face of Economic Nationalism

The journal acquired from Proquest briefly explained about the pros and cons of foreign ownership in United States, Europe, and Asia including the reasons. It also discusses the strong protectionism that is followed with interesting arguments. Below are the comparisons:

Title

CRP: Foreign Ownership and Investment: Evidence from Korea

Journal: Fears of Foreign Ownership: The Old Face of Economic Nationalism

Topic

CRP: understanding the degree of foreign ownership to cash flow sensitivity

Journal: enhance the reasoning for protection and permitting the foreign ownership

Theory used

CRP

Cash flow sensitivity of investment is lower in firms with less constraint. (Fazzari et al., 1988)

The costs of external funds are higher than that of internal funds due to the asymmetry of information between borrowers and lender. Firms tend to rely on internal funds to carry out investment. (Stiglitz and Weiss, 1981; Myers and Majluf, 1984)

Managers who are not owners may pursue their own interest, not the stockholders’ interests. (Jensen and Meckling, 1976)

As managers’ ownership stakes in their firms increase, investment cash flow sensitivities also rise. However, cash flow sensitivities decrease slowly after a certain level of insider holding. (Hadlock, 1998)

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)

Journal (name of the theorists are not mentioned on the contents)

Many of the strongest economies of the world, including those traditionally at the forefront in advocating free and open investments, have been among those expressing vocal concerns about foreign ownership.

Countries are exploring the adoption of policies to protect domestic firms from foreign takeovers by professing security concerns, establishing barriers, and pushing defensive measures.

In US the apprehensions aroused by foreign ownership appear exaggerated.

French restrict their capital market from certain foreign ownership yet encourage their own companies to acquire foreign companies overseas, being criticized for “globalization a la carte”.

UK represents another end of the spectrum in their openness toward foreign investment even in areas heavily protected in other countries, benefits from the highest levels of foreign investment in the world.

China has been more of an exception in demonstrating protectionist tendencies and sensitivity toward foreign investment.

In South Korea, concerns exist that the criminal and regulatory investigations of foreign funds has chilled foreign investors’ confidence.

Globalization, multilateral trading regimes, and the sudden emergence of emerging economies such as China, India, and Russia as active investors in international markets have added a new dimension to the protectionist landscape.

As economic interdependence continues, greater demands for cross-border investment and mergers and acquisitions will occur. The economic imperative of growth will deter countries from pursuing nativist policies toward ownership.

Some special sectors might warrant different treatment such as protection from foreign ownership.

Economic nationalism stems from a combination of fears.

Privatization of former state-owned companies and deregulation of state-controlled industries helped spur a large portion of the recent FDI and mergers and acquisitions, particularly in Europe and Asia.

The global wave of foreign mergers and acquisitions largely proceeds unchallenged without facing public scrutiny.

Hypothesis

CRP: Cash flow sensitivity of investment tends to be lower in foreign owned firm rather than in domestically owned firm.

Journal: Developing countries would appear to be more prone to seek protection from foreign goods and services but ironically many view foreign acquisitions more positively relative to developed countries.

Variables used in research

CRP: K_t, I_t, Q_t, TA_t, B_t, E_t, CF_t, High_i, Low_i, Before_t, After_t

Journal: N/A

Method of analysis

CRP: OLS, GMM, q-model, Euler model

Journal: none

Conclusion

CRP: Cash flow sensitivity of investment decreases as foreign ownership increases, foreign ownership improves a firm’s accessibility to external finance.

Journal: Given the powerful incentives for economic growth, absent other compelling reasons, patriotism through protectionism will not be a sustainable alternative.

Interrelationships among Capital Structure, Dividends, and Ownership

The journal from Proquest tried to explain how entrenched managers affect leverage and firm value related with their managerial share ownership. Below are the comparisons:

Title

CRP: Interrelationships among Capital Structure, Dividends, and Ownership: Evidence from South Korea

Journal: Entrenched Management, Capital Structure Changes, and Firm Value

Topic

CRP: correlation between capital structure, dividends, and ownership using convergence of interest and entrenchment theory

Journal: the effect of high managerial share ownership on entrenched managers

Theory used

CRP

• If management currently owns a very small stake in the firm, then increasing that stake will induce managers to strive toward shareholders wealth maximization as their objectives become more closely aligned with other shareholders. (Morck et al., 1988)
• Because debt incurred today must be repaid in the future, managers who increase debt may be signaling their intent to maximize future firm wealth. (Ross, 1977); (Jensen and Meckling, 1976)
• OLS produces biased and inconsistent estimates in the presence of simultaneously determined variables. (Neter et al., 1983)
• Because both dividends and debt reduce free cash flow, these two variables may also be used to reduce agency costs. (Jensen, 1986)
• Beyond the point of entrenchment, insider stock ownership is positively related to dividend payouts. (Barney, 1994)
• Managers have a larger incentive to reduce agency costs by increasing ownership when debt is increased. (Kim and Sorensen, 1986)
• Debt is an effective substitute for dividends in reducing agency costs. (Jensen, 1986)

Journal

• Entrenched managers use their influence to lower debt levels to the point that capital structure maximizes empire building subject to sufficient efficiency to prevent a takeover. (Zwiebel, 1996)
• The number of covenants in debt contracts is increasing in the fraction of the firm’s shares held by the CEO. (Begley and Feltham, 1999)
• The firm’s tax status affects the choice of financing type. (MacKie-Mason, 1990)
• High tax rate firms issue more debt than do low tax rate firms. (Graham, 1996)
• Issuing equity becomes more expensive as asymmetric information between insiders and outsiders increases. (Myers and Majluf, 1984)
• The announcement return is increasing in the probability of a debt issuance for debt issues and decreasing in the probability of a debt issuance for equity issues. (Chaplinsky, 1991)

Hypothesis

CRP: Leverage is negatively associated with ownership while dividends positively impact ownership.

Journal: Announcement return is related to managerial share ownership.

Variables used in research

CRP

Table 1

• Leverage
• Ownership
• Dividend
• Cash flow
• Capital ratio
• Profitability
• Size

Table 2

• Leverage
• Ownership
• Dividend
• Cash flow
• Capital ratio
• Profitability
• Size

Table 3

• Intercept
• Ownership
• Dividend
• Cash flow
• Capital ratio
• Profitability
• R-squared
• F-statistic
• Log-likelihood
• Observations

Table 4 – same as table 3

Table 5

• Intercept
• Leverage
• Dividend
• Cash flow
• Capital ratio
• Size
• R-squared
• F-statistic
• Log-likelihood
• Observations

Journal

Table 1

• Abnormal return
• Gross proceeds
• Market value of equity
• Surplus leverage
• Leverage change
• Change in leading indicators
• 11-month run up
• Beta
• Total risk
• Residual risk
• Managerial ownership
• 5% block ownership
• Total assets
• Debt-to-assets
• Observations

Table 2

• Constant
• Tax payments/total assets
• Total risk²
• 6-month leading indicators
• 11-month run up
• Surplus leverage
• Managerial ownership
• Managerial ownership: 0-5%
• Managerial ownership: 5-25%
• Managerial ownership: >25%
• Managerial ownership indicator for ‘in excess of median’
• Block ownership
• Block ownership: 0-5%
• Block ownership: 5-25%
• Block ownership: >25%
• Block ownership indicator for ‘in excess of median’
• Interaction of block and managerial indicator variables
• Pseudo R-squared
• Observations

Table 3

• Constant
• Tax payments/total assets
• Long-term debt/total assets
• Total risk²
• 6-month leading indicators
• 11-month run up
• Surplus leverage
• Security type (debt=1)
• Managerial ownership
• Managerial ownership: 0-5%
• Managerial ownership: 5-25%
• Managerial ownership: >25%
• Managerial ownership indicator for ‘in excess of median’
• Block ownership
• Block ownership: 0-5%
• Block ownership: 5-25%
• Block ownership: >25%
• Block ownership indicator for ‘in excess of median’
• Interaction of block and managerial indicators
• Adjusted R-squared
• Observations

Table 4

• Constant
• Total assets^a
• Security type (debt=1)
• Prob (debt)*(1 – security type)
• Prob (debt)*(security type)
• Managerial ownership
• Managerial ownership: 0-5%
• Managerial ownership: 5-25%
• Managerial ownership: >25%
• Managerial ownership dummy for ‘in excess of median’
• Block ownership^b
• Block ownership: 0-5%
• Block ownership: 5-25%
• Block ownership: >25%
• Block ownership indicator for ‘in excess of median’
• Interaction of block indicator and managerial ownership indicator
• Adjusted R-squared
• Observations

Method of analysis

CRP

• 2SLS
• OLS
• Tobit
• 3SLS

Journal

• Descriptive statistics
• Weighted least squares

Conclusion

CRP: Higher levels of ownership and dividends negatively affect leverage.

Journal: Firms with high managerial share ownership experience lower announcement returns.

Asymmetric Information and Dividend Policy

The journal from Proquest tried to show the validity of signaling theory on measuring the correlation between asymmetric information and dividend policy. We can learn both pecking order and signaling theory validity to the topic from both journals. Below are the comparisons:

Title

CRP: The Effect of Asymmetric Information on Dividend Policy

Journal: Asymmetric Information and Dividend Policy

Topic

CRP: correlation between asymmetric information and dividend policy using pecking order and signaling theory

Journal: the validity of signaling theory on correlation between asymmetric information and dividend policy

Theory used

CRP

–          Dividend payments may serve as a mechanism to reduce agency costs of external equity. (Rozeff, 1982); (Easterbrook, 1984)

–          The residual theory suggests that a firm can minimize transaction or issue costs associated with new capital issues by restricting dividends to funds not required for investment purposes. (Higgins, 1972)

–          Dividend policy at the industry level show negative relationship between dividend yield and growth opportunities. (Smith and Watts, 1992)

–          In the presence of asymmetric information, the firm may underinvest in certain states of nature. (Myers and Majluf, 1984)

–          Higher dividends are associated with higher earnings. (Miller and Rock, 1985)

–          The higher the number of analysts following a firm, the higher the amount of resources spent to acquire private information about the firm, the less the asymmetric information between a firm and its investors. (Bhushan, 1989)

–          Analysts play an important role in providing investors with information about firms. (Brennan and Hughes, 1991)

–          More analysts follow firms with greater information disclosure practices which suggest that a higher analyst following is associated with less asymmetric information. (Lang and Lundholm, 1996)

–          The value of dividends in controlling agency costs is likely to be lower in the presence of some other control mechanism such as managerial ownership of shares. (Rozeff, 1982); (Easterbrook, 1984)

–          As the size of the investment increases, other things equal, the ex-ante loss resulting from underinvestment also increases as the firm now has to rely more on external sources for funds. (Myers and Majluf, 1984)

Journal

–          Dividends are sticky and firms usually are reluctant to cut or omit dividends. (Lintner, 1956)

–          A large fraction of analyst forecast error is attributable to misestimation of firm-specific factors rather than to misestimation of economy or industry factors. (Elton, Gruber, and Gultekin, 1984)

–          As firms enhance information disclosure, analyst earnings forecast accuracy increases while forecast dispersion decreases. (Ajinkya, Atiase, and Gift, 1991); (Lang and Lundholm, 1993 & 1996)

–          Firms pay dividends as a signal of firm maturity and declining risk. (Grullon, Michaely, and Swaminathan, 2002); (Hoberg and Prabhala, 2008); (Bulan, Subramanian, and Tanlu, 2007)

–          Larger firms with higher profitability and lower growth potential are more likely to pay dividends. (Fama and French, 2001)

–          Greater analyst coverage may be associated with several firm characteristics, such as lower firm risk and less information asymmetry. (Alford and Berger, 1999); (Hong, Lim, and Stein, 2000)

–          Dividends and institutional shareholdings are positively correlated. (Allen, Bernardo, and Welch, 2000)

Hypothesis

CRP: Dividends are inversely related to the level of asymmetric information.

Journal: Firms that are more subject to information asymmetry are less likely to pay, initiate, or increase dividends, and disburse smaller amounts.

Variables used in research

CRP

Table 1

–          DIVYLD

–          INSOWN

–          ANAL

–          Log (ANAL)

–          MTOB

–          CFTOB

–          BVA ($ mill.)

–          Log (BVA)

Table 2

–          Intercept

–          INSOWN

–          LOGANAL

–          CFTOB

–          MTOB

–          DIST

–          Sample size

–          Chi squared

Table 3

–          Intercept

–          INSOWN

–          LOGANAL

–          CFTOB

–          MTOB

–          DIST

–          ISSUE

–          RELAMT

–          Sample size

–          Chi squared

Table 4

–          Intercept

–          INSOWN

–          LOGANAL

–          CFTOB

–          MTOB

–          SIZE

–          DIST

–          Sample size

–          Chi squared

Table 5

–          Intercept

–          INSOWN

–          MTOB

–          CFTOB

–          DIST

–          PRED

–          Sample size

–          Chi squared

Journal

Table 2

–          Profitability

–          M/B ratio

–          Asset growth

–          Firm size

–          Firm risk

–          Forecast error

–          Forecast dispersion

Table 3

–          Profitability

–          M/B ratio

–          Asset growth

–          Firm size

–          Firm risk

–          Forecast error

–          Forecast dispersion

–          Intercept

–          Number of observations

–          Pseudo R²

Table 4

–          Profitability

–          M/B ratio

–          Asset growth

–          Firm size

–          Firm risk

–          Forecast error

–          Forecast dispersion

–          No analyst coverage

–          Intercept

–          Number of observations

–          Pseudo/adjusted R²

Table 5

–          Profitability

–          M/B ratio

–          Asset growth

–          Firm size

–          Firm risk

–          Forecast error

–          Forecast dispersion

–          Repurchase amount

–          Institutional ownership

–          Dividend premium

–          Intercept

–          Number of observations

–          Pseudo R²

Table 7 (same with Table 3)

Method of analysis

CRP

–          Descriptive statistics

–          Tobit analysis

–          Dividend policy, pecking order theory, and equity issues

–          Dividend policy, asymmetric information, and firm size

–          Dividend policy and issue costs

Journal

–          Time series

–          Repurchase, institutional ownership, and catering

–          Repurchase and payout policies

Conclusion

CRP

–          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.

–          Dividends are unrelated to the insider ownership variable when the level of asymmetric information is explicitly controlled.

Journal

–          The evidence shows lack of support for the signaling theory of dividends.

Capital Structure in the United States Forest Products Industry and Listed Indian Firms

The purpose of this journal is to examine the relationship between corporate income taxes and the use of debt in the forest product industry. We can learn the financing practices across firms by studying the relationship. Below are the comparisons between CRP and the acquired journal from Proquest:

Title

CRP: An Empirical Study on the Determinants of the Capital Structure of Listed Indian Firms

Journal: Capital Structure in the United States Forest Products Industry: The Influence of Debt and Taxes

Topic

CRP: capital structure practice in listed Indian firms

Journal: capital structure practice in Unites States forest product industry

Theory used

CRP

–          A firm’s optimal 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)

–          Equity is issued only when firms have no more debt capacity. (Myers and Majluf, 1984)

–          Firms choose their debt-equity ratio by trading off the benefits from tax reduction on interest payments against the costs of financial distress due to accumulating more debt.

–          Firms with high growth options and high cash flow volatility have incentives to reduce debt in their capital structure over the range of progressivity. (Smith and Watts, 1992)

Journal

–          Firms with other significant non-debt tax shields may exhibit lower EBITs, diminishing the benefit of the deductibility of interest payments, and might choose less leverage in their capital structure.

–          As a firm increases the amount of debt in its capital structure, the value of the firm increases due to the tax shield.

Hypothesis

CRP: Larger firms tend to provide more information to lenders than smaller firms.

Journal

–          Firms with more pretax profits use more debt in their capital structure.

–          Firms with larger nondebt tax shields use less debt in their capital structure.

–          Larger firms use more debt in their capital structure than smaller firms.

Method of Analysis

CRP: regression model

Journal: regression model

Conclusion

CRP: Traditional factors affect financing decision namely profitability, tangibility, taxes, and growth.

Journal

–          Relationship between debt and profitability is negative.

–          Relationship between nondebt tax shields and debt is positive.

–          Relationship between firm size and debt is negative.

Analysis of Capital Budgeting Procedures

This journal is interesting because we can study the benefits and costs of common budget procedures from the perspective of a model with agency and information problems. Below are the comparisons between the CRP and acquired journal from Proquest:

Title

CRP: Capital Budgeting: NPV v. IRR Controversy Unmasking Common Assertions

Journal: Decision Processes, Agency Problems, and Information: An Economic Analysis of Capital Budgeting Procedures

Topic

CRP: Capital Budgeting and Investment Decision

Journal: Agency and Information Problems, Decision Processes

Theory used

CRP

–          The problem arises from confusion of this hierarchy from trying to make economics conform to the mathematics (Herbst, 1982,92)

Journal

–          The agent may distort the information transmitted to the principal if the agent fears about being overruled. (Aghion and Tirole, 1997)

–          Delegation is optimal for projects with routine while approval is better for those with innovation.

–          Delegation does not necessarily become better than approval as the agent’s preferences move into alignment with the principal’s preferences.

–          Corporate managers consistently report that project definition and cash flow estimation is the most difficult and important stage of the busgeting process rather than financial analysis, project selection, project implementation, and project review. (Scott and Petty, 1984)

Hypothesis

CRP: NPV and IRR method is plain mathematics and does not pretend to be a ranking device.

Journal: The quality of capital allocation depends on how effective the decision process is in attenuating agency problems and bringing forth accurate information.

Method of Analysis

CRP

–          NPV

–          IRR

Journal

–          Observation based on facts and cases.

–          Pooling equilibrium and separate equilibrium.

Conclusion

CRP: Capital budgeting decisions are among the most important choices made by managers, selection or rejection of investment proposals defines the firm’s profitability and its survival.

Journal: Agency and information problems might be useful in understanding how firms choose their budgeting processes.

Valuation Errors and the Initial Price Efficiency of the Malaysian IPO Market

The journal discusses about underpricing in Malaysian Stock Exchange. This reading is interesting due to several reasons:

• It examines the errors arising from the valuation methods used to price the IPOs.
• It observes the market condition at the time of the offer and the changes.
• It tests the efficiency of Malaysian stock market.

Comparison

Title

CRP: Discussion of the Book-to-Price Effect in Stock Returns: Accounting for Leverage

Journal: Valuation Errors and the Initial Price Efficiency of the Malaysian IPO Market

Topic

CRP: securities valuation

Journal: valuation errors

Theory used

CRP

–          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.

Journal

–          Grinblatt and Hwang (1989); Welch (1989) stated that high quality firms may deliberately underprice their IPOs in order to signal their quality and recoup the reduction in IPO proceeds from subsequent equity offerings.

–          Ibbotson (1975) stated that reason for underpricing relates to the moral hazard problem where investment bankers/underwriters underprice new equity issues to minimize their risk of under subscription.

–          Baron (1982) stated that reason for underpricing relates to the moral hazard problem where investment bankers/underwriters underprice new equity issues to reduce the effort they have to expend in marketing the new issue.

–          Ou and Penman (1989); Ohlson (1995) suggested belief that firm value can be determined based on company fundamentals.

–          Rosenberg et al., (1985) suggested that the market’s assessment and a company’s estimate of value are unlikely to be the same due to market inefficiency.

–          Kim and Ritter (1999) suggested that an IPO might achieve a low offer price not as a result of deliberate discount given by the issuers but due to errors induced by the valuation method selected to price the offering.

–          Rock (1986) suggested that information differential exists between investors and an IPO company.

–          Ibbotson and Jaffe (1975); Ritter (1984) suggested that the demand for IPO shares increase during bullish market conditions.

–          Ritter (1984) stated that underpricing was measured by taking the difference between the closing market price of an IPO company on its first trading day and the company’s offer price.

–          Logue (1973); Aggarwal and Rivoli (1990) argued that movements in the market index could affect the degree to which IPO shares are underpriced.

–          Ibbotson and Jaffe (1975); Ritter (1984) discovered periods when IPO companies recorded unusually high initial returns.

–          Aharony et al., (1993); Friedlan (1994) stated that some IPO companies may manipulate their NAV in order to increase their offer price.

–          Barker (2001) suggested that the use of forecast earnings of dividends lacks validity since it implies that only profits or dividends affect share prices.

–          Barry and Jennings (1993) indicated that underpricing tends to benefit the initial subscribers to the IPO rather than investors who purchased their shares in the secondary market.

Hypothesis

CRP: Financial leverage has a negative relation with future returns after controlling for the firm’s asset risk.

Journal: If the valuation method is accurate, the absolute prediction errors should approximate zero.

Method of analysis

CRP

–          The use of book values to measure economic leverage

–          The classification of operating versus financial liability

–          Measurement of asset risk

Journal

–          Underpricing per share

–          Market adjusted returns

–          Absolute prediction errors

Conclusion

CRP: 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.

Journal: The factors that influence the level of underpricing of Malaysian IPOs are changes in the market conditions, the price efficiency of the Malaysian IPO market, and valuation errors.

A Conceptual Framework for Practical Risk Measurement in Small Businesses

The article discusses about practical risk measurement in small business. It involves uncertainty, risk, value, and method of calculation. Small business presents unique and practical problems when trying to determine an acceptable rate of return to use in the valuation process. This article is interesting because:

• It distinguishes between uncertainties and risk so uncertainty factors do not get mixed while measuring risk because it is not measurable. Some uncertainties are:

1. Technological obsolescence.
2. Qualities of the competitors.
3. Natural disasters.

• It explains the common problems that are faced in applying small business such as:

1. Growth rate.
2. Availability of long term data.
3. Impact of uncertainty.

• It tells the advantages and disadvantages of using measurement belows:

1. Coefficient of variation.
2. Trend adjusted.
3. Trend forecast.
4. Accounting beta.

Components of Comparison	Article from Class	Own Article
Title	Extending the Capital Asset Pricing Model: the Reward Beta Approach	A Conceptual Framework for Practical Risk Measurement in Small Businesses
Topic	Risk, Return, and Market Efficiency	Risk, Return, and Uncertainty
Theory used by the article / research	–  Sharpe-Lintner created CAPM to produce estimates of firm’s cost of capital. –  Fama and French (2004) concluded that CAPM’s empirical problems invalidate most of its current applications. –  Fama and French (1993) provided three factor model, typically show increasing average excess returns and decreasing CPAM betas as book to market equity increases. –  Fama and French (1992) provided strong evidence for size and book to market effects. –  Bornholt (2006) extends the case by deriving a board class of mean risk asset pricing models that includes the CPAM as a special case. –  Fama and French (1992, 1993, 1995, 1996) argue that size and book-to-market equity must proxy for two underlying risk factors if stocks are priced rationally.	–  DeThomas (1985) showed how the relative dispersion of returns which is the coefficient of variation could map the relative riskiness of small businesses. –  Dickson and Giglierano (1986) noted that a firm with steadily increasing cash flows will find its coefficient of variation large simply because it has been growing. –  Worley and Green (1989) pointed out that a modification of calculation for risk measurement could accommodate the trend of business activity; noted that permitting the use of forecasts of future events become necessary if the value of the firm reflects present value of future cash flows rather than evaluation past performance. –  Hill and Stone (1980) provided a useable link between the accounting statements and the market determined β of a business. –  Ball and Brown (1968,1969) showed a link between accounting statements and market determined βs. –  Collins and Berry (1988) observed that the one risk measure used in the CAPM was not sufficient to capture risk effects. –  Hill and Stone (1980) assumes that average interest expense is unaffected by return on assets and that there is no relationship between the proportion of non equity financing and the return on assets. –  Holmes and Kent (1980) suggests that these previous assumption are valid for small businesses.
Hypothesis of research	Reward beta approach has a sufficient asset pricing justification.	The use of measurement depend on the situation and types of small businesses.
Variables used in research	rf = risk free rate Ri = return of security i Rm = return of market βri = reward beta Є = error term E = expected return	E = expected return rf = risk free rate β = measure of risk Rm = return of market
Method of analysis	CAPM Three factors model Reward beta approach Coefficient of variation Trend adjusted Trend forecast Accounting beta
Result of analysis / research (conclusion)	–          Reward beta approach give better results by estimating more specialized models of expected returns. –          Reward beta approach strongly supported by empirical evidence.	–       Impact of growth, availability of long term data, and the existence of new uncertainties must be considered in calculating expected rate of return.

Ownership Structure, Investment, and Corporate Value

This article mainly talks about the changes of ownership policies and structure in Sweden. The private ownership was created after 1980s and since then a large number of Swedish firms have merged with foreign firms. Foreign ownership share of Swedish Stock Exchange has increased rapidly due to the policies and structure transformation. What makes this article interesting is:

1. A country like Sweden used to have socialist view and anti private ownership in the past.
2. Once the policy shifted, Sweden becomes one of those countries whose business sector underwent the most rapid globalization.
3. How the country protect its vital sectors through their ownership.

The policy is intended to create “capitalism without capitalist” that protects the Swedish and known as historical compromise. Even if foreigners own a large proportion of the shares in a Swedish listed company, their direct influence on the way the firm is managed is usually rather limited. Dominant owners are often Swedish and foreign holdings are normally split up among many owners. In some sectors like mining, steel, and forestry the foreign ownership involvement is limited to increase direct state ownership of corporate sectors.

Components of Comparison	Article from Class	Own Article
Title	Ownership structure, investment, and the corporate value: an empirical analysis	The transformation of Ownership Policy and Structure in Sweden: Convergence towards the Anglo-Saxon Model?
Topic	Ownership, Control and Compensation	Ownership, Control and Compensation
Theory used by the article / research	–   (Morck et al (1988) and McConnell and Servaes (1990)) find non-linear relation between ownership structure and corporate value. –  (McConnell and Muscarella (1985)) have shown that investment positively affects corporate value. –  (Jensen and Meckling (1976) and Stulz (1988)) show that ownership structure affects corporate value. –  (Jensen and Meckling (1976)) argue that ownership structure affects corporate value by its effect on investment. –  (Morck et al (1988) and McConnell and Servaes (1990) empirically explore the overall relation between ownership structure and corporate value using Tobin’s Q as a proxy for corporate value) –  (McConnell and Muscarella (1985) and Chan et al (1990)) explore the second stage of (Jensen and Meckling (1976)) implication concerning the link between investment and corporate value and find evidence in support of the hypothesis that investment affects corporate value. Endogeneity issues : –  (Morck et al (1988) and McConnell and Servaes (1990)) treat ownership structure as exogenous in exploring the relation between ownership structure and corporate value. –  (Demsetz and Lehn (1985)) argue that ownership structure is endogenously determined in equilibrium. –  (Kole (1994)) provides evidence of a revisal 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. –  Finding suggests that, other things being equal, managers may prefer equity compensation when they expect their firm to perform well and consequently the value of the firm to increase. –  (Murphy (1985)) finds that managerial compensation is strongly positively related to corporate performance, suggesting that ownership structure can represent an endogenous outcome of the compensation contracting process.	–  (Sundin and Sundqvist (2001)) shown rapid increase in foreign ownership of Swedish firms. –  (Steinmo (2001) and Katzenstein (1985)) explained that historical compromise would be hard to develop without the predominance of few large firms and even fewer ownership groups. –  (Schumpeter (1942) described the declining economic importance of the entrepreneur as one of the major forces in the transformation from capitalism to socialism. –  (Henrekson and Jakobsson (2001)) detailed the relevance of Schumpeter’s theories. –  (Hall and Soskice, Fehn and Meier (2001)) states that weak minority protection in ownership is common in countries with strong worker protection. –  (Jan Sodersten (2001)) provided calculation on effective marginal tax rate for different combinations of owners and sources of finance. –  (Evans, Leighton, and Jovanovic (1989)) stated that an individual or firm’s wealth position has important effects on the probability of becoming an entrepreneur. –  (Blanchflower and Oswald (1998), Lindh and Ohlsson (1996)) found a positive relationship between private wealth formation and start up activity. –  (Baldwin and Johnson (1999), Audretsch (1995)) stated that totally new products are often produced more efficiently in newly established firms. –  (Blomstrom and Kokko (1998), Baldwin, Braconier, Forslid (1999)) stated that foreign ownership will give rise to higher productivity and greater efficiency in firms.
Hypothesis of research	Ownership structure affects investment which in turn, affects corporate value. And the possibility that ownership structure, investment and corporate value are endogenous.	Changes of ownership structure in Sweden’s business sector result in the demise of the old corporation model of industrial relations, giving way to new trend towards a liberal market.
Method of analysis	Tobin’s q Ordinary Least Squares Simultaneous regression	Tobin’s q
Result of analysis / research (conclusion)	–          Endogeneity affects the inferences one can draw regarding the relation among ownership structure, investment, and corporate value. –          Investment affects corporate value which in turn affects ownership structure but not the reverse suggests that ownership may not be an effective incentive mechanism to induce managers to make value-maximizing decisions.	–       Regarding the ownership structure and policy, most Swedish prefer to have business leaders or entrepreneurs as someone capable to run the firms most efficiently rather than trade union representatives and other types of ownership. –       Few boundaries are created to protect the Swedish importance from foreign firms and investors.

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