The Purpose of the Project

The 1990’s were a decade of internationalization in the Finnish financial markets. This internationalization process resulted in many changes in the Finnish corporate governance system. The purpose of this research project is to investigate how these institutional changes influenced the Finnish financial markets. More specifically, we investigate the following issues:

(1) the determinants of capital flows to and from the Finnish market and within the Finnish market. We investigate both company specific determinants of the capital flows as well as differences in trading strategies between various investor categories. Results from this subproject are expected not only to contribute scientifically but are also expected to have policy implications both on the company and the market level.

(2) the changing links between corporate governance and financial information, i.e. questions such as

1. Information: What types of information is required by external stakeholders? What types of information is required by the corporate governance mechanism to effectively monitor the mananagement, and by the capital markets for investment decision-making?

2. Managers' behavior: Why and how managers use discretion over the production and dissemination of financial information? Why and how managers manipulate accounting numbers, and choose the content of information and dissemination mechanism for disclosure of financial information?

3. Role of corporate governance: How can the corporate governance mechanism ensure that managers use their discretion over the quality of financial information to enhance it and not to reduce it? How do various corporate governance mechanisms differ in their influence on managers’ use of discretion over financial information?

(3) the distribution of profits, i.e. questions concerning the choice between dividends and share repurchases given a heterogeneous investor base, and the causes and consequences of actual share repurchases. Unlike in most countries, such as the U.S., data on actual repurchases on Finnish stocks is available on a daily basis. This feature allows a much more direct and powerful test of the causes and consequences of actual repurchases than what has been documented in the existing academic literature. Answers to these questions concerning the distribution of profits not only have great academic interest, but are also of concern to corporate managers.

(4) corporate reward systems and chief executive turnover. This project seeks to (1) give a broader insight to what factors drive the introduction of stock option programs and other reward systems to the top management and to the members of the board of directors, and (2) to examine the determinants of voluntary and forced CEO changes in Finland during the two last decades. Moreover, we investigate how CEO turnover and the role of governance and other variables have changed over time.

(5) the overall cost of capital. The cost of capital of a company depends on its shareholder base. As markets become more integrated, the investors’ benchmark for assessing the systematic risk of a company is likely to switch from a domestic one to a global one (or a combination of both as in partially segmented markets). In various subprojects, we will start by (1) testing general asset pricing models for stock pricing, and then move on to investigate the cost-of-capital considerations in the connection of (2) IPOs, (3) venture capital financing, and (4) public debt financing. The results of the project are expected to contribute to the international asset pricing literature and can also answer questions of the effects of the monetary union on our markets. The results also have many practical applications since cost-of-capital measurement is needed not only in the company level for investment projects, and when assessing the value of takeover targets, but by regulators when settling cases where companies are charged to misuse their dominating market power.