Richard Ivey Building 3308
- Foreign Exchange
- Corporate Governance
- Valuation of International Securities
- Empirical Methods in Financial Economics
- To search for publications by a specific faculty member, select the database and then select the name from the Author drop down menu.
Associate Professor, Finance
Stephen Sapp received a Bachelor of Science degree with Distinction (mathematics and chemistry) from Mount Allison University, a Masters degree (applied statistics) from the University of Toronto and completed his Ph.D. (finance) at the Kellogg School of Management, Northwestern University. Before deciding to pursue his doctoral studies, he worked as a consultant at both the German Cancer Research Centre and the Centre for European Economic Research. Before coming to Ivey, Professor Sapp was an adjunct lecturer in Finance at Kellogg where he taught Investments.
Professor Sapp's research interests are concentrated in international finance. In particular, he is interested in how the globalization of financial markets has influenced the observed behaviour and interactions between investors and firms operating in diverse financial markets. In particular, Professor Sapp has examined how changing economic conditions influence financial decisions in global equity markets and the foreign exchange market. His research considers the effects at the level of both the individual trader as well as the overall market. Extending this work, he is studying how differences in the regulatory and corporate governance structures across countries influence firms' decisions. For example, how different ownership structures and corporate governance systems influence strategic decision-making, especially executive compensation.
Professor Sapp enjoys various outdoor activities such as golf, sailing, tennis, biking and all types of skiing.
- Finance, HBA
- International Finance, HBA/MBA
- International Business, MBA
- Risk Management, MBA
- Empirical Finance, PhD
- PhD Kellogg School of Management, Northwestern University
- MSc, University of Toronto
- BSc, Mount Allison University
Recent Refereed Articles
Strike, V., Berrone, P., Sapp, S., Congiu, L.,
2015, "A socioemotional wealth approach to CEO career horizons in family firms", Journal of Management Studies, June 52(4): 555 - 583.
Abstract: This paper challenges the predominant view that as CEOs near retirement, they forgo risky long-term strategic choices and instead focus on decisions that enhance their own short-term self-interests. Drawing on the socioemotional wealth (SEW) literature, we argue that unlike near-retirement CEOs in widely held firms, near-retirement CEOs in family firms are more concerned about transgenerational control and the legacy that they pass on to future generations. We further contend that the priority of SEW dimensions can change within family firms depending on the CEO's time to retirement. Consequently, near-retirement CEOs in family firms differ from their counterparts in nonfamily firms in that they are willing to continue to engage in international acquisitions as they approach retirement, despite the potential short-term risks. We further hypothesize that this effect depends on whether the CEO is a family member, whether the CEO is succeeded by another family member, and whether the CEO is the founder. In analyzing 3,432 family and nonfamily firm-year observations from the S&P 500 for the period between 1997 and 2009, we find support for our hypotheses. Subsequent analyses indicate that near retirement, family CEOs acquire larger and culturally closer targets than their nonfamily counterparts. Our paper confirms the need to more fully consider the characteristics of owners and managers in analyses of the CEO career horizon problem.
Link(s) to publication:
Van Essen, M., Strike, V., Camey, M., Sapp, S.,
2015, "The Resilient Family Firm: Stakeholder Outcomes and Institutional Effects", Corporate Governance-An International Review, May 23(3): 167 - 183.
Abstract: Research Question/Issue: Our study seeks to explain the relationship between publicly listed family-controlled firms (FCFs) and investor and employee outcomes before and during the global financial crisis. Theoretically, we develop hypotheses suggesting that FCF resilience is beneficial to both investor and employees. Employing a large firm-level data set of 2,949 firms across 27 European countries, we test the hypotheses that FCFs' long-term orientation makes them resilient to the effects of economic shocks. In addition, using hierarchical linear modeling we evaluate family firm investor and employee outcomes, and the moderating impact of legal institutions protecting minority investors and employees. Research Findings/Insights: We find that FCFs financially outperform non-FCFs during the financial crisis, beginning in 2007 and reaching its lowest point in 2009, but show no significant differences during the stable-growth period between 2004 and 2006. We evaluate two employee outcomes: downsizing and wage decreases. We find that FCFs are less likely to downsize their workforce or cut wages in both pre-crisis and crisis conditions. Based upon hypotheses founded in the comparative capitalisms logic, we find significant institutional effects that are contrary to our predictions. Our findings suggest that investors and employees of FCFs achieve more favorable outcomes for their interests when the rules pertaining to investor protection and their enforcement are poorly developed. Theoretical/Academic Implications: We contribute to the emerging literature on the institution-based view of comparative corporate governance by demonstrating that family-controlled firms' stakeholder outcomes are contingent upon legal protection for employees and investors under contrasting economic circumstances. Practitioner/Policy Implications: Family owners, employees and minority investors should consider both firm-level and country-level governance institutions when investing in different countries, especially in times of economic crisis as jurisdiction-level institutions and firm ownership choices produce variable outcomes for different stakeholders in both crisis and non-crisis conditions.
Link(s) to publication:
Foerster, S.R., Sapp, S., Shi, Y.N.,
2014, "The Effect of Voluntary Disclosure on Firm Risk and Firm Value: Evidence from Management Earnings Forecasts", Advances in Quantitative Analysis of Finance and Accounting, October 12: 179 - 213.
Abstract: This study investigates whether the voluntary disclosure of management earnings forecasts is associated with investors’ assessment of firm risk and firm value. We find a significant negative relationship between the issuance of management earnings forecasts and a variety of measures of firm risk (idiosyncratic risk, stock return volatility, beta, and bid-ask spreads). Considering specific features of the management earnings forecasts, we find more frequent, more precise and more accurate earnings forecasts are associated with a larger decrease in firm risk. Our results therefore suggest that information quality is an important determinant of both diversifiable risk and nondiversifiable systematic risk. We also demonstrate that management earnings forecasts are positively associated with firm value as captured by Tobin’s Q. More frequent, precise and accurate forecasts further enhance valuation premiums. Finally, we partition our sample into good news versus bad news forecasts, and show that the results are driven more by good news forecasts. Overall, releasing high-quality management earnings forecasts is associated with important capital market benefits.
Link(s) to publication:
Foerster, S.R., Fogler, L., Sapp, S.,
2014, "Northern Exposure: How Canadian Micro-Cap Stock Investments Can Benefit Investors", Journal of Investment Consulting 15(1): 36 - 50.
Abstract: Micro-cap stocks, a subset of small stocks, have the potential to provide additional diversification benefits and increased returns to investors. The ways that micro-cap stocks can contribute to investors’ actual portfolios have not been rigorously investigated. In this study, we examine micro-cap stocks in Canada and consider investability constraints and transaction costs that are overlooked in most other size-effect studies. We find that micro-cap stocks in Canada have relatively high returns and a low correlation to large stocks in Canada, the United States, and other developed markets. We conclude that these findings demonstrate that Canadian micro-cap stocks appear to represent a unique asset class and that investing in this unique asset class can improve the risk-return characteristics for global investors’ overall portfolios. We therefore suggest that global investors consider adding Canadian micro-cap stocks to their portfolios.
Link(s) to publication:
Foerster, S.R., Sapp, S.,
2011, "Back to Fundamentals: The Role of Expected Cash Flows in Equity Valuation", North American Journal of Economics and Finance, December 22(3): 320 - 343.
Abstract: To better understand how investors have historically valued equities, we compare monthly values of the S&P Index to our corresponding estimated fundamental values from 1871 to 2010, using ex ante available information. We find that the simple Gordon Growth Model performs better than other, more sophisticated valuation models. Based on the Gordon Growth Model, equities were undervalued prior to 1914, overvalued between 1914 and 1981, and fairly valued until 2010 after controlling for well-known economic and price-based factors. We also find the implied market risk premium over this period is around 5%.
Link(s) to publication:
Goerzen, A., Sapp, S., Delios, A.,
2010, "Investor Response to Environmental Risk in Foreign Direct Investment", Management International Review, December 50(6): 683 - 708.
Abstract: The theory of internalization suggests that proprietary assets—usually in the form of advertising and/or marketing capabilities—are the key to understanding a firm’s ability to create value in foreign markets. We show that the capacity of a multinational corporation (MNC) to create value in a foreign direct investment (FDI) can also result from the use of an alternative proprietary asset; that is, the skills and management expertise that are acquired through the accumulation of various forms of foreign experience. The value creation comes from the extension of an MNC’s experience-based capabilities to the host country to mitigate country-level risks. This experience can moderate the negative influence of environmental risk to create value for a firm and its investors. In our sample of 305 FDIs, we find that Japanese MNCs that had direct or indirect experience in a host country showed greater abnormal returns in a FDI, particularly where environmental risk was high.
Vandenbosch, M.B., Sapp, S.,
2010, "Opportunism Knocks", Sloan Management Review (MIT), Fall 52(1): 17 - 19.
Abstract: The relentless drive for efficiency over the past two decades has resulted in complex supply chains in which participants are increasingly disassociated from the final customer transaction. Complex supply chains, with a multiplicity of agents, are more prone to problems, and on occasion, to spectacular collapse. We study several market failures ranging from the failure of Peanut Corporation of America to the subprime mortgage crisis. Although these crises appear to be very different and were certainly shaped by their unique circumstances, we propose that a primary cause was essentially the same: the failure of the market mechanism to root out opportunism within the different levels of the market or supply system. What’s more, the conditions present in our sample of failures are identical to those present in a wide spectrum of today’s supply chains. We explain why opportunism flourishes in today’s complex and interconnected environments and provide a checklist for managers seeking to better protect themselves from opportunism risks.
Lo, I., Sapp, S.,
2010, "Order aggressiveness and quantity: How are they determined in a limit order market?", Journal of International Financial Markets, Institutions & Money, July 20(3): 213 - 237.
Abstract: Dealers trading in a limit order market must choose both the order aggressiveness and the quantity for their orders. Since little research has considered how dealers make this trade-off, we empirically investigate how dealers jointly make these decisions in the foreign exchange market using a unique simultaneous equations model. Our model uses an ordered probit model to account for the discrete nature of order aggressiveness and a censored regression model to capture the quantity decision recognizing the clustering of orders at the smallest available quantity, $1 million. Using two currency pairs with very different trading characteristics, we find evidence of a trade-off between order aggressiveness and quantity. We also find a significant role being played by factors related to the levels of information asymmetry and liquidity in the dealers’ choices of both the order aggressiveness and quantity.
Southam, C., Sapp, S.,
2010, "Compensation Across Executive Labor Markets: What Can We Learn from Cross-Listed Firms?", Journal of International Business Studies, January 41(1): 70 - 87.
Abstract: There is wide consensus that chief executive officers (CEOs) of US firms earn significantly more than their Canadian counterparts. Using a matched sample, we find that the majority of this difference is due to US CEOs earning 50% more than CEOs of Canadian non-cross-listed firms. We find no such ``US premium'' for Canadian cross-listed firms, because the use of options allows the cross-listed firms to keep pace with their neighbors to the south. While firms that list only in Canada compete in the labor market defined by their national boundary, cross-listed firms appear to be competing directly with their US counterparts for executive talent. In investigating alternative explanations for the elimination of the compensation differential for Canadian cross-listed firms, we find evidence consistent with both the bonding and the rent extraction hypotheses.
Kaul, A., Sapp, S.,
2009, "Trading Activity, Dealer Concentration and Foreign Exchange Market Quality", Journal of Banking & Finance, November 33(1): 2122 - 2131.
Abstract: We study the relation between foreign exchange market quality and both trading activity and dealer concentration by considering two currency pairs with significant differences along both dimensions - the Euro-US dollar and Canadian dollar-US dollar. A variance ratio test reveals over-reaction in currency prices, but that this is smallest when trading activity is high and dealer concentration at its peak. A GARCH model shows that over-reaction declines as trading activity and dealer concentration increase, with the results being stronger for the Euro. Our results confirm that trading activity is an important determinant of market quality, but also point to a significant role for dealer concentration.
Lo, I., Sapp, S.,
2008, "The Submission of Limit Orders or Market Orders: The Role of Timing and Information in the Reuters D2000-2 System", Journal of International Money and Finance, November 27(7): 1056 - 1073.
Abstract: Recent work in the market microstructure literature suggests that the speed with which orders arrive in the market impacts traders' order submission decisions. In this study we use an asymmetric autoregressive conditional duration (ACD) model to empirically investigate the influence on the submission of limit and market orders of changes in the time between the past submissions of different types of orders, changes in the slope of the limit order book, and changes in price uncertainty. We find that the expected time between the arrivals of successive orders in the foreign exchange market depends on the previous type of order submitted and the slope on both sides of the order book. Price uncertainty (volatility) plays a secondary role after accounting for the impact of changes in the slope of the order book. Lastly, we find that there are fundamental changes in the level of information contained in the submission of orders at the opening and closing of markets.
2008, "Sweet Deals - Canadian Regulators Need to Do a Better Job of Curbing Excessive CEO Pay Packages. Here's How", Canadian Investment Review, Fall 21(3): 18 - 23.
Abstract: The article discusses the ways by which Canadian regulators can curb the excessive chief executive officer pay packages. It was observed that the executive compensation is seen as a problem in Canada, but not at the same level as in the U.S. A report by the Institute of Corporate Directors Blue Ribbon Commission discusses how good governance can come from independent and diligent directors on the human resources committee following a strong process to design executive compensation packages.
2008, "The Impact of Corporate Governance on Executive Compensation", European Financial Management, September 14(4): 710 - 746.
Abstract: This paper examines the relationship between the compensation of the top five executives at a set of over 400 publicly listed Canadian firms and various internal and external corporate governance-related factors. The media is full of stories suggesting a relationship between large executive compensation packages and failures in governance at various levels within organisations, but there exists little formal analysis of many of these relationships. Our analysis provides empirical evidence supporting some of these assertions, refuting others and documenting new relationships. We find that variances in internal governance related to differences across firms in the characteristics of the CEO, compensation committee and board of directors do influence both the level and composition of executive compensation, especially for the CEO. Considering external measures of corporate governance, we find that different types of shareholders and competitive environments impact executive compensation. We do not find that either the internal or external governance characteristics dominate.
Charlebois, M., Sapp, S.,
2007, "Temporal Patterns in Foreign Exchange Returns and Options", Journal of Money, Credit and Banking, March/April 39(2/3): 443 - 470.
Abstract: Although the foreign exchange market is believed to be one of the most efficient financial markets in the world, there is significant evidence that technical analysis is profitable in this market. In this study we investigate the ability of information from the options market to supplement the commonly used information on past prices to predict temporal patterns in foreign exchange returns. We find that information from the options market improves the performance of technical trading strategies. Strategies using information from at-the-money options were more consistently profitable than the most commonly used strategies based on only historical spot exchange rates (past prices). Our results hold out-of-sample as well as in the late nineties, a period when few sources of information have proven reliable. Consequently options appear to contain valuable information regarding future spot exchange rate movements.
Foerster, S.R., Sapp, S.,
2006, "The Changing Role of Dividends: A Firm-Level Study From the Nineteenth to the Twenty-First Century", Canadian Journal of Economics, November 39(4): 1316 - 1344.
Abstract: We investigate the changes in dividend policy for one of North America's oldest banks (and Canada's first bank), Bank of Montreal, over time by considering the relationships between dividends, prices and earnings for this prominent firm. In the early part of the sample we find that annual dividend and earnings changes are highly variable with dividend changes following changes in earnings, and a larger portion of investors' returns coming from dividends. Since World War II dividend policy is characterized by more stable and gradual increases in dividends with more of investors' returns coming from capital gains. Overall our results suggest that investors' perception of dividends has changed over time allowing management to pay smaller dividends and re-invest funds in the firm.
- Teaching: Kellogg School of Management