24/5/15: Markets, Patterns and Catalysts: Irish Growth Story

Some of my slides from last week's presentation at the All-Ireland Business Summit, covering three key themes:

The Current State of the Irish Economy "The Market Section"

The New Normal of rising global risk "The Pattern"

A Policy Path to Growth "The Catalysts"

2/10/2013: Clusters Resilience in Downturns

Interesting research paper from CEPR on the resilience of firms clusters to the downturns. The DP 9667 "Are clusters more resilient in crises? Evidence from French exporters in 2008-2009" by Philippe Martin, Thierry Mayer, and Florian Mayneris (September 2013) looks at two types of clusters: traditional clusters and incentivised clusters.

Per abstract [emphasis mine]:

• "Clusters have already been extensively shown to favor firm-level economic performance (productivity, exports, innovation etc.)."
• "However, little is known about the capacity of firms in clusters to resist economic shocks."
• "In this paper, we analyze whether firms that agglomerate in clusters and firms that have been selected to benefit from the "competitiveness cluster'' industrial policy, implemented in France in 2005, have performed better on export markets during the recent economic turmoil."
• "We show that, on average, both agglomeration and the cluster policy are associated with a higher survival probability of firms on export markets, and conditioning on survival, a higher growth rate of their exports."
• "However, these effects are not stronger during the 2008-2009 crisis; if anything, the opposite is true."
• "We then show that this weaker resilience of competitiveness cluster firms is probably due to the fact that firms in clusters are more dependent on the fate of the "leader", i.e. the largest exporter in the cluster."

Note: couple of things to note as a potential lesson to be learned:

1. Make clusters more horizontal, rather than vertical, to reduce excessive dependency on one 'leader' firm.
2. The above is probably even more critical of a consideration for clusters involving partnering of smaller firms with larger MNCs.

24/4/2014: Mandatory or Voluntary Board Independence?

An interesting paper on the impact of independent directors appointments on equity prices published in September-October 2012 issue of the Emerging Markets Finance & Trade (vol 48, number 5, pages 25-47) throws some light on the role of regulatory and governance restrictions relating to Corporate Governance.

Traditionally, and especially in the present economic climate of mistrust of the enterprise and markets, imposition of the regulatory requirements for independent directors appointments to the boards of the companies is seen as a good thing. The argument in favour of mandatory requirement of this sort goes along the lines that forcing a company to comply with the 'best practice' in corporate governance leads to an improvement in company performance. Presence of independent directors on the boards, especially where mandated, is seen as one of the most important aspects of board-level governance, bestowing the benefits of monitoring of the management decisions and performance, as well as signalling to investors (and even potentially customers and counterparties to the firm's operations) the quality of the firm (at least as far as its governance structures are concerned).

If the above thesis is correct, on average, firms operating in the regulatory environment of mandatory requirements for appointment of independent non-executive directors should outperform (from investor perspective) firms operating in the environment where such appointments are not required.

Ming-Chang Wang and Yung-Chuan Lee - in their paper titled "The Signaling Effect of Independent Director Appointments" - use data for Korean plcs during the period of time when some of the firms were covered by the explicit requirement for appointment of directors and some operated in the environment where such appointments were made on the basis of voluntary choice of the firm board.

The authors hypothecise that "analytical model proposes that the market expects voluntary appointments to bring more positive value than mandatory appointments since voluntary appointments signal the integrity of the firm". And indeed, the authors find that voluntary and not mandatory appointments "are associated with higher abnormal returns from appointment announcements, particularly for firms with severe agency problems..."

Empirical results from the study show that:

1. "... there are significantly positive market reactions to the announcements of the appointment of independent directors" in terms of abnormal returns in days 0, 1 and 2 after the announcement (+0.095-0.125%) and in cumulated abnormal returns "in the windows after and between the event day" at 0.236% and 0.254%, respectively.
2. "... mandatory appointment policy has not provided investors with any significant monitoring value, and we can therefore also state that the regulation has not been effective for the market".
3. "In contrast to the mandatory appointments, the significantly positive abnormal returns of the voluntary appointments for days 0, 1, 2, and 3 reveal the possibility of the existence of a combination effect of both signaling and monitoring value after the event day, based upon firms' voluntarily appointing independent directors to signal their integrity."

From the point of view of the policy systems, the results above suggest that instead of imposing mandatory requirements, we would be better off cultivating voluntary culture of board independence and appointment of directors with truly independent track records. Afterall, when you think of the potential for cronyism determining or co-determining appointments choices in the mandatory requirement setting, you can see that mandatory appointments can do more damage than good to both the firms and the markets.