Is Firm-specific Return Variation a Measure of Information Efficiency?
Kee-Hong Bae(Schulich School of Business York University)
Jin-Mo Kim(Rutgers Business School Rutgers University)
Yang Ni(Antai College of Economics & Management Shanghai Jiao Tong University)

The issue of whether firm-specific return variation measures the private information reflected in stock returns or trading noise is controversial. Using a firm’s geographic proximity to its investors as a proxy for a firm’s private information, we investigate the relation between firm-specific return variation and price informativeness. We find that firms located in metropolitan areas experience higher firm-specific return variation and that holdings and trading by local institutional investors positively affect firm-specific return variation. These findings suggest that higher firm-specific return variation is indicative of more informative stock prices.

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Corporate Governance and the CEO Pay?Performance Link: Australian Evidence*
Emma Schultz(Research School of Finance, Actuarial Studies and Applied Statistics, Australian National University)
Gloria Y. Tian(School of Banking & Finance, Australian School of Business, University of New South Wales)
Garry Twite(McCombs School of Business, The University of Texas at Austin)

We examine the influence of corporate governance mechanisms, namely blockholdings and board structure, on CEO pay–performance sensitivity in listed Australian firms. Results highlight blockholders’ role in shaping observed pay–performance associations and their impact varying with their independence and relative magnitude of ownership. Monitoring blockholders increase the sensitivity of long-term at-risk pay to performance, better aligning manager and shareholder interests. However, consistent with a shorter investment horizon, insider blockholders increase (decrease) the responsiveness of cash bonuses (long-term at-risk pay). Finally, consistent with them affording less-effective monitoring, larger boards raise (lower) the sensitivity of known pay (long-term at-risk pay) to performance.

*We gratefully acknowledge financial support provided by both the Australian National University and the University of New South Wales. We also thank the following people for the useful comments and suggestions they provided in relation to the paper: Sudipto Dasgupta (the editor), an anonymous referee, Joseph Fan, Tom Smith, and participants at the 2006 AGSM Research Camp, the 2007 Asian Finance Association meeting and the 2007 China International Finance Conference. All remaining errors are our own.

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Long-Run Stock and Operating Performance of Underwriter Warrants: Evidence from Seasoned Equity Offerings*
Sung C. Bae(Department of Finance, College of Business Administration, Bowling Green State University)
Kiyoung Chang(College of Business, University of South Florida Sarasota-Manatee)
Hoje Jo(Department of Finance, Leavey School of Business, Santa Clara University)

We examine the long-run stock and operating performance of firms issuing underwriter warrants. Using matched samples, we found significant long-run underperformance of seasoned equity offerings (SEOs) with warrant compensation, relative to SEOs with cash compensation, following offering announcements. Profitability measures of firms issuing underwriter warrants are also significantly lower over the post-offering period. In sharp contrast to these results, growth measures of warrant-issuing firms are greater for both pre- and post-offering periods. Combined together, our results suggest that underwriter warrants are offered in a way to take advantage of the higher growth potential of issuing firms in the short term, whose growth trend is, however, transitory and not materialized into higher stock or operating performance over the long-run, post-offering period. We interpret our results as suggesting that the certification effect of SEOs with warrant compensation through growth signaling does not last in the long run. We further offer a behavioral approach as explanations of the short-run outperformance of SEO firms with warrant compensation with empirical evidence supporting the Miller’s divergence of opinion hypothesis.

*The authors acknowledge many helpful comments from Soku Byoun, Yongtae Kim, Chee K. Ng, and James S. Schallheim on the earlier version of this article. Suggestions from an anonymous referee and the editor-in-chief (Sudipto Dasgupta) of the Journal were particularly helpful to improve the exposition of our article. The usual disclaimer applies.

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Board Committee Meetings and Firm Financial Performance: An Investigation of Australian Companies*
Mohammad Ziaul Hoque(Department of Accounting and Finance, Monash University)
MD. Rabiul Islam(Department of Economics, Monash University)
Mohammad Nurul Azam(Department of Quantitative Analysis, King Saud University)

This article examines how the frequency of board committee meetings impacts on Australian firms’ financial performance. Data were collected from 118 Australian listed companies – including 26 financial firms and 92 nonfinancial firms – for the period 1999–2007. Analysis of that data shows that the frequencies of audit committee meetings and remuneration committee meetings are positively and significantly associated with return on equity and return on assets. The frequencies of risk committee meetings do not show any significant effects on the financial performance of Australian firms. Estimated results are found to be robust after controlling for internal as well as external governance mechanisms that might affect Australian firm performance.

*Helpful comments and suggestions from the editor, an associate editor, and a referee are gratefully acknowledged. The authors are indebted to the Department of Accounting and Finance, Monash University, Australia for funding the study. The authors are also thankful to Salina Siddque for her excellent research assistance. The authors bear full responsibility for any errors that may remain.

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Aggregate Australian Takeovers: A Review of Markov Regime Switching Models
Lien Duong(School of Accounting, Curtin University)

This article reviews the case of modeling merger waves in the Australian market for the period 1972–2004. Three Markov switching models are examined, the Gaussian AR(1), Poisson AR(1), and State-Space autoregressive moving average (ARMA) (1,1), to find which gives the best fit. The State-Space Markov switching ARMA(1,1) model is found to be the best for describing Australian takeover activity as estimation results based on it have a lower Bayesian information criterion score than the other two models. Each model’s ability to predict a ‘wave’ is then tested by including its estimated probability in a macroeconomic model to explain merger activity. The State-Space model also performs better because the inclusion of its estimated probability substantially increases the explanatory power of the regression model (measured by the regression adjusted R2). In addition, it predicted a takeover wave in 2009, which was closer to the actual incidents of takeover activity in the market at that time than the predictions of the other two models. The results are robust when the measure of takeover activity is changed from the number of takeover bids to the proportion of takeover bids relatively to the number of exchange-listed companies.

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