Strategic Finance

Assignment 1

Student Name:

UOB ID:

Unit Code :

Word Count:

Submission Deadline : 17th September, 2021

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Table of Contents
1. Introduction ............................................................................................................................ 3

2. Relationships between corporate governance practices and stock market performance ....... 3

2.1 Change in Directors / New Directors / Resigned Directors ............................................. 3

2.2 Related party transactions / Internal Controls – Frauds / Compliance ............................ 4

2.3 Ownership changes / Shareholder activities .................................................................... 5

2.4 Financial Performance / Position ..................................................................................... 5

3. Determinates of stock market returns for the selected company ........................................... 6

3.1 Introduction to the Company ........................................................................................... 6

3.2 Macro Factors .................................................................................................................. 7

3.1.1 Interest Rates / Exchange Rates / Inflation Rates ..................................................... 7

3.1.4 Political / Economic stability .................................................................................... 7

3.2 Industry Factors ............................................................................................................... 8

3.3 Company Factors ............................................................................................................. 9

3.2.1 Dividends / Rights Issue / Bonus Issue Announcements .......................................... 9

3.2.11 New initiatives / changes in initiatives / cessation of initiatives .......................... 10

3.2.12 Financial Performance / Position .......................................................................... 10

Conclusion ................................................................................................................................. 6

References ................................................................................................................................ 12

Appendices............................................................................................................................... 15

Appendix 1: Macro Economic Factors ................................................................................ 15

1.1 Declining Interest Rates on Deposits ......................................................................... 15

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1. Introduction
The aim of corporate disclosures is to minimise unfavorable selection caused by information
asymmetry among shareholders and managers, share internal organisational information with
external parties and minimize the cost of capital for businesses (Diamond & Verrechia,
2001). Therefore, it is crucial to understand the impact of corporate disclosures on the share
price of an organisation.

Using empirical research, this paper aims to assess the impact of changes in corporate
governance and its impact on the share price performance. Furthermore, the real case of
Barclays bank UK was considered to examine the impact of macro factors, industry factors
and company factors on its share price.

The analysis is divided into four sections: an introduction that explains the significance and
objectives of the paper; a discussion of changes in organisational corporate governance and
its impact on share price based on literature; an evaluation of the impact of various factors
which have affected the share price of Barclays Bank in the recent years and a logical
conclusion summarising the findings.

2. Relationships between corporate governance practices and stock market performance

2.1 Change in Directors / New Directors / Resigned Directors

Lin, Pope, and Young (2003) conducted an investigation on non-executive director
appointment announcements in the United Kingdom between 1993 and 1996. Given that the
average change in the share price was insignificant, this suggests that shareholders do not
inevitably gain from the nomination of non-executive directors.

Warner, Watts, and Wruck (1988), on the other hand, present empirical evidence of
unfavorable market reaction to forced director resignations. According to these researchers,
one probable reason for this is that the disclosure of a forced departure is taken as a signal of
poor present and future company performance.

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From the studies of Mahajan and Lummer (1993), it was identified that the announcements of
director resignations on non-conflictual basis lead to decline in share prices of the affected
organisation. The researchers suggest that such news are interpreted by shareholders as a loss
of important human capital by the organisation which would probably decline investor
confidence in the firm.

However, according to Gurgul and Majdosz (2007), director resignations due to retirement
should be considered in isolation from other non-conflictual resignations. Due to the fact that
the latter can typically be predicted, no share price movement should be noticed, since
shareholders expect newer, competent directors to be a part of the director board.

Therefore, the contradicting evidence suggests that the share price changes as a result of
director board changes depends on a variety of factors and situations.

2.2 Related party transactions / Internal Controls – Frauds / Compliance

Sharma and Verma (2020) studied the impact of fraud announcements of frauds on share
prices of Indian banks where fraud cases exceeding ₹1,000 crores were considered during the
period of 2014-2018. The findings indicated that such fraud announcements lead to the
abnormal loss of share price among Indian banks.

Moreover, Tay et al (2016) studied the impact of white-collar crime on the share-price of
listed companies in Malaysia which indicated that such shares indicated a negative abnormal
return on the share price following crime announcements.

On the other hand, Mammen and Edakalathur (2019) studied the impact of fraud
investigations on the affected company’s share price using 3 different companies from 3
sectors (Volkswagen, Valeant Pharmaceuticals and Toshiba). The studies indicated that the
fraud investigations negatively impacted the share price of Volkswagen and Valeant
Pharmaceuticals while the share price of Toshiba was unaffected, thus indicating mixed
results.

Similarly, Song and Han (2017) investigated the influence of corporate misconduct on the
South Korean stock market and discovered negative stock price movements surrounding such
disclosures.

Therefore, considering the overall findings of these studies it can be concluded that
fraudulent activities in listed organisations would negatively impact the share price
performance of such organisations.

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2.3 Ownership changes / Shareholder activities
Ownership structure has been considered as one of the main corporate governance
mechanisms which impacts the scope of an organisation's agency costs (Shleifer and Vishny,
1997). Studies conducted by Mitton (2002) concluded with no significant relationship
between insider ownership and share price performance for a sample of East-Asian
companies.

Andres (2008), analyzed a sample of 275 listed German companies and concluded that
companies with significant family ownership are more positively and outperform their peers
with other type of shareholders with regard to share price.

However, Anderson et al. (2009), who ranked founder- and heir-controlled organisations in
the United States classified these type of organisatios as less transparent, thus negatively
impacting the share price due to the possibility of hidden agenda of the family members who
own the organisation.

He et al. (2013) conducted an extensive survey using 3189 firms in 40 markets where in their
findings, using cases across the world, indicated that firms with foreign ownership, positively
related to probability of informed trading and enhanced share prices. This could be due large
shareholders trading based on greater information available to them thus liquidating their
shares as a result of negative information. This would help facilitate the capitalisation of
stock market fundamentals into these share prices.

2.4 Financial Performance / Position

Financial performance is an accomplishment made by a firm over a period of time to
determine how well it has followed the rules of financial implementation (Asmirantho,2013).
Several inidcators can be used to deduce the financial performance or position of a listed
organisation. For this purpose Debt to Equity Ratio, Net Profit Margin and Firm Size was
considered

Sukesti et al. (2021) conducted a survey on 136 manufacturing companies from the
Indonesian Stock Exchange and identified a positive relationship between the financial

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indicators of Debt Equity Ratio and share price while Net Profit Margin and Firm Size does
not have a significant impact on share price.

However, Vo (2019) conducted a study on listed fisheries organisations in Vietnam

discovered that firm size has a favorable impact on return on assets, which improves the
company's financial performance, thus positively affecting the organisation's value and stock
price. Similarly, studies by Ramli, Latan and Solovida (2019) found that firm size had a
positive relationship with the company’s performance thus leading to an increase in share
price. Their argument is that the firms large size allows the generation of higher returns on
assets and sales, leading to enhanced firm financial performance due to gaining higher
production values.

On the other hand, Murniati (2016) suggests that Debt to Equity Ratio have positive and
significant effect to stock price. These findings could be inconclusive and different possibly
due to the differences in regulatory frameworks, share holder perceptions and other country-
wise disparities which exists in the various studies.

3. Determinates of stock market returns for the selected company

3.1 Introduction to the Company

Barclays Bank was founded in 1690 in the United Kingdom and incorporated as Barclay &
Company, Ltd. in 1896. The bank recorded an operating income of £21.8bn and operating
expenses of £13.7bn during the year 2020. The bank through its subsidiaries, provides
various financial products and services in the United Kingdom, rest of Europe, the Americas,
Africa, the Middle East, and Asia. As of December 2020, the bank recorded an employee
base of 80,800 and a market capitalisation of UK£30.436b. It offers financial services, such
as retail banking, credit cards, wholesale banking, investment banking, wealth management,
and investment management services.

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3.2 Macro Factors

3.1.1 Interest Rates / Exchange Rates / Inflation Rates

Interest rates are an macroeconomic variable, which directly relates to economic growth
(Uddin and Alam, 2010). Therefore, interest rates directly impact a bank's performance since
banks are key economic actors. As a result of Covid pandemic, the Bank of England base rate
was reduced from 0.75% to 0.25% on the 1st of March 2020, and then further reduced to
0.1% on 19th March 2020 (Shearer and Tetlow, 2021). Such strategy was conducted to lower
borrowing expenditure of UK businesses and households. However, such low interest rates
hurt Barclays' business serving UK consumers in the first quarter of 2020, albeit mortgages
climbed by £3.6 billion. Moreover, customers lower borrowing and spend levels due to the
pandemic resulted in a 28 percent drop in revenue for Barclaycard in the UK. Studies by Cox
et al. (2020) on the initial impact of the pandemic, identified that rather than labor market
disruptions, spending losses were mostly due by direct consequences of the pandemic.

Nevertherless, studies by Uddin and Alam (2010) states that interest rate has significant
negative relationship with share price. Therefore, it is expected that if the interest rate has
been controlled in the United Kingdom then it will benefit the stock market as it would lead
to demand pulling in more investors as a result of higher rates than bank deposits. When
compared with pre-pandemic May 2019 figures, all average interest rates on deposits had
declined by between 19% and 29% as of April 2020 (Aikman, 2021) (Appendix 1.1). This
would have benefited the share price of Barclays as investors would be willing to invest in its
shares due to better returns.

3.1.4 Political / Economic stability

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3.2 Industry Factors

3.2.1 Government policies / New taxes

The Bank of England, as the regulator of Banks were able to borrow an amount up to 10% of
the amount they lend to businesses and additional funding was be available for banks that
increased lending, especially to SMEs (Office for National Statistics, 2021). As a result,
during the coronavirus pandemic, the bank was one of the largest suppliers of emergency
loans, handing out £27 billion to enterprises. It has also given over 680,000 payment holidays
to consumers with mortgages, credit cards, and loans around the world (BBC News, 2021).
This may have also negatively impacted the financial performance of the bank in relation to
interest income , thus negatively reflecting on share price.

3.2.2 Community response

Community response to pandemic news was considered to have an impact on share price of
listed companies. Salisu and Akanni (2020) took on the task of creating a worldwide fear
index for COVID-19 and examining the impact of fear and panic on share prices. The aim of
their research was to see how much of the market disruption might be attributed to the
pandemic which indicated that share prices reacted adversely to fear inducing news related to
the pandemic.

On the positive side, the assurance of COVID-19 vaccines from Moderna, Pfizer, and other
manufacturers has improved share prices across stock markets. As a result, The share price of
Barclays had risen by 40% from 107p to 150p, as at mid-November.

Görker et al. (2020) who studied the impact of the pandemic related news to the banking
sector share prices in Turkey such news had a significant negative Abnormal Rate of share
prices for example, when the World Health Organisation declared COVID-19 as a pandemic.
This indicates that the continuous decline of share price of Barclays in the past year has been
as a result of the negative community response to the pandemic. Barclays share price has
declined over 140% since the March 23rd lows of the year 2020 which was the start of the
pandemic in the UK and 16% over the year to date as of June 2021 (Trefis Team, 2021).

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Further, as of 23rd July 2021 at its existing share price of $9 per share, the bank's stock has
be said to be trading 25% below its fair value of $12 according to experts (Trefis Team,
2021).

Moreover, the share price movements of Barclays are justified by the studies of Gaa (2020)
who studied the impact of Covid-19 related news on the share prices of the UK banking
industry. The results of the event study indicated a significant abnormal
reaction in general; however only negative news events resulted in
noticeably negative abnormal returns, while positive news events did not
demonstrate consistent results, unlike in the case of Barclays share price
rise due to vaccination news.

3.3 Company Factors

3.2.1 Dividends / Rights Issue / Bonus Issue Announcements

Despite the prevailing pandemic, the bank decided to announce its plans to buy back £500m
worth of shares from its investors, together with paying a half-year dividend of 2p a share
(White and Whither, 2021). This indicated that shareholders who were blocked from
receiving divident payouts for the majority of year 2020 as a result of Bank of England
imposed Covid restrictions on dividend suspension, are now in line to receive £800m worth
of payouts. This announcement lead to the increase in share prices by 3.7%. (Markatoff,
2021).

Archana (2019) states that according to the dividend signaling theory, an announcement
about dividend payments suggests positive future prospects of the company therefore, such
information is considered as favourable news among investors thus resulting in a positive
impact on the share price of Barclays.

Moreover, the share buyback decision is considered as a positive outcome since sound capital
allocation decisions seems to be of high significance during volatile times, as 50% of free
cash flow in the S&P 500 was directed to share buybacks (Patel and Patel, 2020). This is
because directors boards have been tasked with protecting the interests of all stakeholders and

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instead of only shareholders during times of such a pandemic (Mathew and Sivaprasad, 2020)
.Therefore, it can be said that the positive movement the share price is justified by the sound
decisions taken by the BOD of Barclays indicating that corporate governance is a crucial
factor in ensuring stakeholder expectations are met.

3.2.11 New initiatives / changes in initiatives / cessation of initiatives

Cost cutting initiatives of Barclays as a result of overcoming the negative effects of the Covid
pandemic had a negative impact on Barclays share price. Barclays announced on 30th June,
2021 that it would be moving its staff from its corporate and investment bank office into its
main headquarters in an apparent cost-cutting exercise and a long-term review of its real
estate footprint due to an increase of home working due to Covid-19 (Smyth, 2021). Barclays
has been targeting a cost to income ratio of 60% across all its divisions and managed to
maintain the cost income ratio at 57%, over the same period (Butcher, 2021). Even though,
it was expected that this saving would have been have been used to increase employee pay, it
wasn't the case at Barclays. As a result its share price fell by 2.5% within the day to 169.32p,
its lowest point in almost two months.

This decision was possibly taken due to cost to income ratio, depsite being below the target,
had risen from 51% in the previous year (Butcher, 2021). The top management of the bank
stated that the bank is saving money to leverage growth areas like transactional and
investment banking. Moreover, CEO Jes Staley mentioned the bank is investing in
developing sector-wise expertise in technology, healthcare and sustainability, where these
cost savings would be utilised (Butcher, 2021).

These decisions are in line with the suggestions of Atici and Gursoy (2020) who state that
boards need to take proper decisions to ensure that they are well equipped to meet future
issues by planning for extreme conditions and providing enough technical infrastructure,
which includes investments in innovation and digitalization.

However, shareholders and other stakeholders were expecting that the cost savings would be
transferred to employees as a result of the pandemic (Butcher, 2021). Hence, not meeting
their expectations lead to the drop in share prices by 2.5% within a day.

3.2.12 Financial Performance / Position

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Barclays which reported a near-quadrupling in first-half profits, said it would pay an interim
dividend of 2 pence per share, equivalent to around 340 million pounds in total (White and
Withers, 2021) . The bank reported profit before tax of 5 billion pounds for the six months to
June 30, well above the consensus forecast of 4.1 billion pounds from analysts polled by the
bank and up from 1.3 billion a year ago (White and Withers, 2021). As a result of this
announcement the Barclays share price rose by 3%.

On the other hand, Barclays revenue remained relatively stable over the second quarter of the
year 2021. The company’s total income reached £5.4bn, compared with £5.3bn in the second
quarter of 2020 and £5.5bn in the same period of 2019. The Bank's corporate and investment
banking segment further contributed to rising financial performance, with this segment
reporting a 52% rise in profits to £1.6bn in the second quarter of 2021, due to rising merger
and takeover activity (Markatoff, 2021).

Furthermore, after taking a combined £3.7 billion impairment charge in the first half of 2020
as it projected the impact of the pandemic, the company benefited from a £757 million credit
impairment release, mainly reflecting the improving of the UK's macroeconomic outlook,
according to the bank.

Moreover, Barclays has £1.9bn of credit provisions held against loan losses in reserve, which
it could potentially release if the UK economy continues to improve. This cautious approach
of Barclays has lead to its ability to rebound to pre-pandemic level performances which has
helped the Bank improve its share price after diminishing share prices as a result of the
pandemic. However, the company aims to remain cautious of the economic outlook, despite
the improvements in the macroeconomic environment since the outlook continues to increase
in uncertainty and is open to change depending on the progression and continuation of the
COVID-19 pandemic which affects global financial operations. Such financial performance
by the bank indicates that strong corporate governance is able to steer organisations in the
correct direction in turbulent times. This is justified by Core, Guay and Rusticus (2006) who
state that proper CG practices are able to minimise agency issues and improve organizational
performance while maximising shareholder wealth.

Conclusion
The aim of this paper was to examine the impact of coperate governance policies of
organisations on the share market performance of organisations. Initially, an analysis of

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literature has been conducted to identify the impact of changing directors, fraud, ownership
changes and financial performance of an organisation on its stock market performance, where
all factors proved to have an impact on share price. This section was followed by an analysis
of the real life case study of Barclays Bank PLC stock market performance which is a listed
UK bank. The performance of the bank's share prices over the recent years has been justified
using relevant empirical research.

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Appendices

Appendix 1: Macro Economic Factors

1.1 Declining Interest Rates on Deposits

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Source: Aikman (2021)

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