Executive Stock Options and Manipulated Stock-Price Performance*
Liu Zheng(Department of Accountancy, City University of Hong Kong)
Xianming Zhou(School of Economics and Finance, The University of Hong Kong)

Previous studies have examined the manipulation of executive stock option awards and exercises, focusing on information timing by managers. In this paper, we investigate managerial manipulation of stock-price performance motivated by stock options. To distinguish performance manipulation from information timing, we examine stock returns surrounding the departure of retiring CEOs, whose option holdings typically expire shortly after their departure and whose chances to manipulate option awards and exercises are minimized. Consistent with manipulated performance, we find significant abnormal stock returns in the months surrounding CEO departure for those with strong option incentives, which are reversed shortly after CEO departure.

*We would like to thank an anonymous referee, Qiang Kang, Jun Liu, Qiao Liu, Xueping Wu, and seminar participants at the 2010 China International Conference in Finance, 2010 European Finance Association annual meeting, University of Hong Kong, and Southwestern University of Finance and Economics for helpful comments and suggestions. Quan Chen and Li Sun provided valuable research assistance. The authors gratefully acknowledge the financial support of the Hong Kong Research Grants Council (Grant no. 7678/05H).

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Voluntary Cooperation in Terms of International Financial Supervision*
Pavel Diev(Economics and International Relations, Banque de France)

This article analyzes the issue of voluntary cooperation in terms of international financial supervision. A simple modeling framework is provided where financial supervision is an international public good and thus may be underprovided globally. The article asks a simple question: would national supervisors cooperate and increase the level of global supervision, and by how much? I use coalition formation game theory to address this question. The main results are the following. If the situation is completely symmetric (identical-sized countries and symmetric externalities), the amount of cooperation is relatively high and full cooperation could be achieved for particular numbers of countries involved in the negotiations. However, in general, full cooperation would not be an equilibrium because countries have incentives to free ride on the cooperation of other countries. Introducing asymmetries in the size of the countries and/or in the externalities between countries reduces the scope for cooperation. However, higher asymmetries are not necessarily related to lower cooperation if the distribution of asymmetries has a particular shape, such that big countries are generating large externalities on small countries, as it might be the case in reality.

*The views expressed here are those of the author and do not necessarily reflect those of the Banque de France. I would like to thank Francis Bloch and participants in the Banque de France research seminar for their helpful comments on an earlier draft of the article.

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The Effects of Market Makers and Stock Analysts in Emerging Markets*
Karolis Cekauskas(Department of Economics, Stockholm School of Economics in Riga)
Reinis Gerasimovs(Department of Economics, Stockholm School of Economics in Riga)
Vytautas Liatukas(Department of Economics, Stockholm School of Economics in Riga)
Talis J. Putnis(Department of Economics, Stockholm School of Economics in Riga)

We exploit a quasi-experiment to examine the effects of market makers and stock analysts in three emerging stock markets. We find substantial differences in the effects across markets, and in contrast to existing literature, the effects of market makers are not always positive. Our results suggest that the structure of market makers’ agreements and compensation matters for their effects on market quality. Stock analysts, on balance, have marginally positive effects on liquidity and informational efficiency. The benefits of market makers are weaker in the presence of stock analysts, and vice versa, suggesting that market makers and stock analysts are more like substitutes than complements in their effects on market quality.

*The authors thank Nasdaq OMX Baltic for providing the data used in this study, and participants of the 3rd International Conference on Economies of Central and Eastern Europe and an anonymous referee for helpful comments.

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Dynamic Optimal Pension Fund Portfolios when Risk Preferences Are Heterogeneous among Pension Participants
Toshiki Honda(Graduate School of International Corporate Strategy, Hitotsubashi University)

In this paper, we consider the problem of an optimal pension fund portfolio given the heterogeneous risk preferences of pension fund participants. The relative risk aversion of a pension fund tends to be a decreasing function of the level of aggregate wealth. We find that the dynamic optimal portfolio is simply characterized as the weighted sum of the optimal portfolio for each participant. Our model helps successfully establish the microfoundation of asset liability management models. A numerical example using recent Japanese data indicates the significant total welfare losses of adopting a suboptimal portfolio strategy and an inefficient risk-sharing rule.

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Disagreement in a Multi-Asset Market*
Xue-Zhong He(Finance Discipline Group, UTS Business School, University of Technology, Sydney)
Lei Shi(Finance Discipline Group, UTS Business School, University of Technology, Sydney)

This paper provides a simple framework to study the effect of disagreement in a multi-asset market equilibrium by considering two agents who disagree about expected returns, variances, and correlation of returns of two risky assets. When agents’ subjective beliefs are characterized by mean preserving spreads of a benchmark homogeneous belief, we show that the effect of the disagreement does not cancel out in general and the effect in a multi-asset market can be very different from a single asset market. In particular, the market risk premium can increase and the risk-free rate can decrease significantly even when the market is overoptimistic and overconfident.

*We would like to thank Kristoffer Glover, Paul Kofman, and Gordon Menzies for helpful comments and conference participants at 2009 KIER-TMU International Workshop on Financial Engineering (Tokyo, Japan), 2009 PhD Conference in Economics and Business (Perth, Australia), and 2010 Asian Finance Association Conference (Hong Kong). In particular, we would like to thank the editor, Michael Lemmon, and a referee for their helpful comments and valuable suggestions which have significantly improved the paper. The usual caveat applies. Financial support from the Australian Research Council (ARC) under Discovery Grant (DP0773776) is gratefully acknowledged.

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