Essays on corporate finance, monetary policy and asset pricing on London Stock Exchange

Balafas, Nikolaos Essays on corporate finance, monetary policy and asset pricing on London Stock Exchange. Doctor of Philosophy thesis, University of Liverpool.

	PDF THESIS_FINAL_N.BALAFAS.pdf - Submitted version Access to this file is embargoed until Unspecified. Available under License Creative Commons Attribution No Derivatives. Download (1MB)
	PDF BalafasNik_Feb2013_9573.pdf - Author Accepted Manuscript Available under License Creative Commons Attribution No Derivatives. Download (1MB)

Abstract

The present thesis examines how stock returns in the UK market are related to two specific firms’ characteristics that have attracted the interest of policy makers and the academic literature due to their importance during the recent global financial crisis: i) the financial constraints that firms face in their attempt to invest and grow at their desirable pace and ii) the level and structure of the compensation that corporations pay to their executives. Chapter 2 examines how the financial constraints that firms may face in their attempt to invest and grow at their desirable pace are related to the stock returns earned by their shareholders during the period 1988-2010. To this end, Chapter 2 uses a survivorship bias-free sample of firms listed on LSE and a series of proxies to measure the degree of financial constraints that these firms face. Classifying firms as financially constrained or unconstrained according to each of these proxies, we examine whether the most financially constrained firms yield a higher level of returns to investors relative to the least constrained ones. The main finding of Chapter 2 is that investors in highly constrained firms were not rewarded for being exposed to this aspect of risk, regardless of the utilized proxy. To the contrary, the portfolio containing the most constrained firms underperformed the portfolio containing the least constrained firms in most of the cases we have examined. Chapter 3 examines the effect of firms’ financial constraints on the response of their stock returns to UK monetary policy shocks during the period 1999-2011. These shocks are extracted on the meeting days of Bank of England’s Monetary Policy Committee. Using a survivorship bias-free dataset of firms listed on LSE and a number of proxies to measure firms’ financial constraints, we find no significant evidence to support the argument that the return response of the most constrained firms is of greater magnitude relative to the corresponding response of the least constrained firms. The opposite is actually true for most of the measures we use. Moreover, we find that the inverse relationship between monetary policy shocks and stock returns became positive during the 2007-2009 crisis period. Finally, the relationship between stock returns and monetary policy shocks in the UK market exhibits state dependence, especially across tight versus loose credit market conditions. Chapter 4 examines the relationship between the level and the structure of the compensation that firms listed on LSE pay to their executives and the subsequent returns that their shareholders earn during the period 1998-2010. Total CEO compensation is decomposed into its cash- and incentive-based components. The results in Chapter 4 indicate a strong negative relationship between CEO incentive pay and future shareholder returns. Moreover, the outperformance of firms with low pay is less pronounced but still apparent when longer investment horizons are considered. Finally, we provide evidence that, in contrast to incentive pay, cash pay is not found to be related to future shareholder returns in a statistically significant way. Chapter 5 concludes this thesis, providing an overview of its contributions and empirical results, outlining their implications and discussing issues for future research.

Item Type:	Thesis (Doctor of Philosophy)
Additional Information:	Date: 2013-02 (completed)
Uncontrolled Keywords:	Asset Pricing, Financial Constraints, London Stock Exchange, Risk-adjusted performance, Cost of Capital, Monetary Policy Shocks, Credit Channel, Bank of England, CEO Compensation, Incentive, Equity Linked Pay, Executive Pay, Stock Returns, Shareholder Wealth
Subjects:	?? HG ??
Divisions:	Faculty of Humanities and Social Sciences > School of Management
Depositing User:	Symplectic Admin
Date Deposited:	20 Aug 2013 13:26
Last Modified:	16 Dec 2022 04:38
DOI:	10.17638/00009573
Supervisors:	Alex, Kostakis Chrisostomos, Florackis
URI:	https://livrepository.liverpool.ac.uk/id/eprint/9573