Understanding financial decision-making, markets and institutions

People walking in a busy city street

Financial and economic decision-making dominates our lives; movements in financial markets feature in the news we read and hear regularly, and events such as the Global Financial Crisis have significant short- and long-term impacts. The financial decisions that corporations make impact the fortunes of both their shareholders and employers. For individuals, financial decisions can have lifetime implications.

The study of finance helps us to make sense of the markets we invest in and the decisions individuals and corporations make.

Our research in finance focuses on:

  • how markets work (Asset Pricing and Microstructure);
  • how investors think and act (Behavioural Finance);
  • how corporations invest and how they are organised (Corporate Finance and Corporate Governance); and
  • banking and financial institutions.

Our financial systems research encapsulates firm-level and country-level financial reporting comparability and transparency, earnings management, accounting conservatism and financial distress. This research includes an analysis of the role of financial institutions, behavioural and corporate finance, corporate taxation, fraud prevention, firm profitability and investment efficiency. Our work is underpinned by strong analytic skills in areas such as Financial Econometrics and Mathematical Finance.

CEO pay gap Researchers: A/Prof. Shams Pathan, Prof. Robert Durand, Prof. Robert DeYoung (Kansas), Dr Mamiza Haq (UQ), Jacob Morgan (NAB)

The large compensation received by bank executives is among the many factors blamed for the risk-taking that led to the 2008-2009 financial crisis. We test whether and how pay disparities between CEO and non-CEO executives—the so-called CEO pay gap—influenced bank stability and performance. Perhaps surprisingly, we find strong evidence that larger CEO pay gaps are associated with greater bank stability, improved financial performance, and greater information transparency. Our results imply that placing absolute limits on bank CEO pay would likely result in increased bank risk-taking.

Shareholders’ say-on-pay voice (SoP) Researchers: Prof. Shams Pathan, Prof. Robert Durand, Prof. Carlos Fernandez Mendez (Oviedo)

Both long-term institutional investors (e.g., pension funds and mutual funds) and short-term institutional investors (e.g., hedge funds) have increased their shareholdings over the past few years. These increased shareholdings have been accompanied by increased assertiveness in influencing the decisions of their portfolio firms. The changes in activism of both short-term and long-term institutional shareholders and the growing engagement of long-term shareholders with their investee boards have attracted considerable attention from the public, regulators, and academics. We attempt to understand how these significant institutional investors influence important firm outcomes such as transparency.

Their Own Worst Enemies: Behavioural Finance and the Investments of Australian Households Researchers: Prof. Robert Durand, Dr Joyce Khuu, Dr Joye Khoo, Christopher Bebbington

Two important determinants of an individual’s superannuation balance upon retirement are the money contributed into their fund and the way that it is invested. Behavioural Finance suggests that investors can be their own worst enemies when it comes to wealth creation. Using theories and methodologies drawn from Behavioural Finance (where Finance applies psychology to modelling financial markets and investors’ decisions), this project analyses household data to examine how behavioural biases influence investment decisions and wealth creation.