«Published Annually Vol. 6, No. 1 ISBN 978-0-979-7593-3-8 CONFERENCE PROCEEDINGS Sawyer School of Business, Suffolk University, Boston, Massachusetts ...»
This study builds on the existing literature by empirically investigating the relationship between executive risk sharing and the firm’s stock performance in new and old economy firms. It tries to answer the fundamental question of whether or not using risk sharing contracts actually motivate executives to increase shareholder value, and whether that effect differs between new and old economy firms. The results show that the level of risk sharing does not influence the future market value of firm shares.
However, it does negatively influence the current and future return to shareholders in high-risk sharing firms, low-risk sharing firms, and old economy firms, but not in new economy firms. The results also indicate that more intensive stock-based contacts positively influence current and future stock performance. These results indicate that although stock based compensation contracts include a level of risk sharing, the level of risk sharing is not what drives stock performance. Instead, it is the value of the stock based compensation that drives performance leading to a higher market value per share and higher return to shareholders. This result appears to be much more pronounced in new economy firms where stock-based compensation is extensively used compared to old economy firms.
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‘Wealth management’ may be defined as a comprehensive and customized strategy to help clients attain long-term financial goals. The banking industry can play a key role in designing and delivering client-specific products that help individuals, small businesses and families in attainment of these financial goals. This paper outlines briefly the concept of wealth management and underlines the key opportunities for the Indian banking industry in providing wealth management services. According to a World Wealth Report (2011) by Merrill Lynch Global Wealth Management (MLGWM) and Capgemini, in 2010 India’s High Net Worth Individuals (HNWIs) population became the twelfth largest in the world, growing at 20.8 percent from the previous year.
However, the clientele for wealth management services by banks should also include the upwardly mobile middle-class Indian population looking for effective financial management. While private sector banks have been providing wealth management services for Indian HNW population, public sector banks have yet to tap the opportunities provided by the growing Indian HNW and middle class population. Provision of wealth management services provides a strong opportunity for public sector banks to increase their fee- based income.
Wealth management is the provision of specialized financial services to High Net worth (HNW) individuals to help them meet their specialized financial goals. The key focus in wealth management is the individual and his financial needs given his risk appetite and income horizon. Globally the provision of wealth management services and private banking is one the key areas in which banks have ventured. The definition of High Net Worth (HNW) individuals who form the core target group for wealth management services differs across providers and across countries with differing income belts. While globally there have been huge strides in the wealth management and private banking business, in the Indian market, provision of wealth management services by banks is still at a nascent stage. Given the growth of the Indian HNW individual and middle class population, there will be a significant demand for these services in the near future.
The private banks have made considerable inroads into this segment of the Indian market. Private banks like HDFC, HSBC, BNB Paribas, Citibank India, Barclays India, RBS Private Banking Division India have attained considerable success in the provision of customized financial planning and wealth management services to the growing HNW population in India. However, the growing middle class Indian population remains untapped by them. The public sector banks have a distinct advantage in the provision of wealth management services to the upwardly mobile Indian middle class population given their huge customer base and expansive branch network. Further, the rise in the Indian HNW population would mean an increasing demand for customized wealth management and private banking services, which opens up a significant opportunity for the public sector banks. Given the falling interest income, public sector banks have an opportunity of increasing fee-based income by provision of wealth management services. The private banks have been hugely successful in increasing their fee-based income while public sector banks have lagged behind. With profitability of banks coming under further pressure due to deregulation of interest rates, increasing fee-based income will be crucial for the banks. Provision of wealth management services provides one of the most viable avenues for increasing fee based income.
The private banking industry globally has moved beyond privately owned banks and commercial banks, with the industry now consisting of a much wider array of providers. The industry thus includes privately owned banks, most of whom are Swiss with an indentified strength in providing superior and individually tailored service to their customers; commercial banks, mostly European and US banks which are multinational with a strong home base and strong historical ties to markets such as the Middle East, Asia and Latin America; investment banks, which are mostly US with specialist skills appropriate for very wealthy clients; brokerage houses with strong advisory and execution capability combined with access to diverse investment research;
and asset managers who are investment product specialists with limited distribution and narrow product range but appropriate for clients looking for a more integrated wealth management approach.
The PwC 2011 Global Private Banking and Wealth Management Survey, which surveyed a record 275 institutions from 67 countries, has underlined that the new competitors in this industry are questioning the dominance of established firms. New regulations, which are increasing the cost of operations and newer more demanding clientele, who are more cautious and less loyal with clear expectations, are forcing private banks and wealth managers to rethink their client service infrastructures and the way they operate. The report concur that wealth management continues to be a lucrative business with untapped potential for significant growth if institutions can be agile in adapting to meet changing demands.
The Indian strategy
In India, select banks have been active in the recent years in provision of wealth management services to the growing High Net Worth (HNW) population. This is evidenced by the growing number of foreign banks that have made forays into the Indian industry in the last five years. The HNI population in India is growing by leaps and bounds and India’s population of high net worth individuals (HNWs) has become one of the largest in the world. In 2010, India was 12th in the global list, replacing Spain.
Asia-Pacific Wealth Report from Merrill Lynch Global Wealth Management and Capgemini looks at the behavior of high net worth individuals (HNWIs) and the responses of wealth management providers in eleven core markets: Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan, and Thailand [together accounting for 95.7% of the region’s gross domestic product (GDP)]. It points out that Asia-Pacific HNW segment again performed well in 2010, extending its recovery from the crisis driven decline of 2008. The number of HNWIs in the region grew to 3.3 million in 2010, from 3.0 million in 2009, making the HNWI population 18.3% larger than in 2007. As a result of that growth, the Asia-Pacific HNWI population also became the second-largest in the world, overtaking Europe (which had 3.1 million HNWIs in 2010), and nearing that of North America (3.4 million). India’s HNI population grew at 20.8 per cent to 153,000 compared with 126,700 in 2009.
The Indian market has seen a huge expansion of HNWI populations and wealth, fueled by strong macroeconomic growth and by market performance (especially equities and real estate). However, public sector banks have not been very active in this area.
The Indian middle class is also slated to expand with increases in disposable incomes in the coming decade. A new study by the McKinsey Global Institute (MGI) suggests that if India continues its recent growth, average household incomes will triple over the next two decades and it will become the world’s 5th-largest consumer economy by 2025, up from 12th in 2007. Along the way, spending patterns will shift significantly as discretionary purchases capture a majority of consumer spending. With the expansion of Indian middle class and rise in their disposable income the potential beneficiaries of financial planning have increased manifold over the last few years and this trend is going to continue in the coming decades.