The Capital Asset Pricing Model

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Understanding the cross-section of equity market returns has been one of the most researched topics in finance for many years. The Capital Asset Pricing Model (CAPM), introduced by Sharpe (1964), Lintner (1965) and Black (1972), states that there is a linear relation between beta (systematic risk) and expected stock returns and that beta is sufficient to explain the variation in expected returns. The validity of the CAPM, however, has been questioned by many empirical studies which have provided evidence supporting the hypothesis that average stock returns are predictable in the cross-section. The predictive factors include firm size, book-to-market ratio, momentum, profitability growth, and capital expenditures.
The separation between ownership
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However, in empirical research, there is no consensus on the effect of corporate governance on firm performance. For instance, Gompers, Ishii, and Metrick (2003) studied the impact of corporate governance on firm performance during the 1990s. They found that stock returns of firms with strong shareholder rights outperform the returns of firms with weak shareholder rights. In contrast, Core, Guay and Rusticus (2006) documented that share returns of companies with strong shareholder rights do not outperform those with weak shareholder rights.
In addition, corporate governance has increased in prominence and importance in the business arena in recent years (Rankin, 2006). With the collapse of Xerox, Enron, Tyco International and Worldcom in the US, Parmalat in Italy and other high profile companies including HIH, One.Tel and Harris Scarfe in Australia, there has been a call for improved corporate governance mechanisms (Kiel and Nicholson, 2003; Lavelle, 2002; Thomas, 2002; Department of Treasury, 1998). Given these mixed findings and a rise in the importance of corporate governance, this thesis attempts to examine the impact corporate-governance-related factors have on firm value. Specifically, the current thesis focuses on the impact of three factors, namely incentive payments to chief executive officer (CEO), discretionary accruals, and firm technical efficiency improvement on stock returns in
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Specifically, in a survey in 1997, Deegan documented that a small proportion of managers held the equity interest in the firm, usually as a part of an employee share scheme. However, more recent studies have indicated that stock-based compensation is increasing in importance as a component of remuneration packages in Australia (Coulton and Taylor, 2002b; Matolcsy and Wright, 2006a; Chalmers, Koh and Stapledon, 2006). In a sample constructed from the top 200 Australian firms across the period from 1999 to 2002, Chalmers et al. (2006) observed that stock options were commonly used, accounting for approximately 20 percent of average executive pay. This increasing importance of incentive pay is partly explained by the effect of globalization: Australians firms might follow their counterparts, particularly firms in the US, where the major part of compensation that firms pay their CEOs is in the form of restricted stocks, stock options, or other non-cash components (Lee,

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