“In Brand We Trust”: How Brand Equity Can Influence a Firm’s Default Risk

PurposeThis paper aims to analyze the monitoring role of board and product market competition in relation to firm performance. Further, this paper analyzes the moderating role of product market competition in influencing the board monitoring and firm value relationship in the context of an emerging economy, India.Design/methodology/approachA large sample of 3,854 firm-year observations has been used over a period of 10 years (2007-2016). Industry and year-fixed effect regression methodology has been used to test the hypothesized relationships.FindingsThe empirical findings indicate that board monitoring adds negatively to the firm value. The results also indicate that product market competition bears an insignificant moderating effect on the effectiveness of board monitoring in India. However, a more in-depth analysis reveals that product market competition complements the weak board monitoring of business-group firms. Further, the effectiveness of the board monitoring (which is relatively stronger in business-group firms) is weakened by the increased level of product market competition for stand-alone firms.Research limitations/implicationsA significant negative effect of board independence on the firm value raises the effectiveness of various policies advocating the board independence to strengthen the governance structure of the firms. The findings relating to the moderating role of product market competition for the business-group and stand-alone firms are helpful in understanding the governance behavior of the firms in relation to the external product market competition.Originality/valueExternal governance mechanisms such as the market for corporate control and product market competition have been described as significant corporate governance mechanisms. However, the empirical efficacy of these governance mechanisms has not been explored in a greater detail in the context of the emerging markets. This study aims to address this research gap.

PurposeThe purpose of this paper is to examine the role of product market competition in shaping a firm’s reporting quality (RQ).Design/methodology/approachThis research uses an aggregate measure of a firm’s RQ, considering both the absolute level of discretionary accruals (DA) and the quality of accruals, using modified Jones model and Francis et al. (2005) accruals quality model, respectively. Whereas, the Herfindahl-Hirschman index and the Lerner index are used to measure product market competition. Further, this study considers the transitional economy of China and employs panel data estimation techniques for testing the hypothesized relationships.FindingsThis study finds that firms operating in more competitive industries are associated with higher RQ. This association still prevails when analysis is done using the component measures of RQ (i.e. the absolute level of DA and the quality of accruals). Overall, the empirical results provide evidence on the disciplining role of product market competition among Chinese firms.Practical implicationsGiven the complex governance structures and specific kind of agency problems in Chinese corporations, this study suggests that product market competition may play an external disciplining role to improve the corporate information environment.Originality/valueThis research explores the role of product market competition for a firm’s RQ in Chinese-listed companies, while the prior studies on the same topic are mostly from the developed countries.

Purpose – The study aims to examine the association between product market competition and corporate investment decisions on, particularly, risk-taking and investment efficiency. Existing theoretical studies on whether product market competition mitigates or exacerbates agency problems are inconclusive. Prior research generally finds that competition constrains management opportunism in reporting operating performance. However, the association between product market competition and managerial investment decisions has largely been unexplored. Design/methodology/approach – The primary measure of product market competition is the Herfindahl–Hirschman Index. The authors use regression analysis to examine the association between corporate risk-taking and over-investment of free cash flow (FCF) (as dependent variables) and product market competition (as an independent variable). Findings – Using firm-year observations from 1990 to 2010, the authors find that competition encourages managers to invest in risky investment. They also find that competition disciplines management on its use of FCFs. Overall, their results provide support for the disciplining role of product market competition in management investment decisions. The results are robust after they control for shareholder activism and executive compensations. Originality/value – The paper contributes to the literature by providing evidence of the disciplining role of product market competition in management investment decisions. First, the results suggest that competition encourages managers to invest in risky investment. One potential explanation for the results is that competition reduces opportunities for resource diversion for management personal benefits and, in turn, decreases management risk aversion. Another explanation is that competition forces management to take more risks for the long-term survival of the company. Second, the results indicate that competition disciplines management on its use of FCFs. Although firms in highly competitive industries make investment decisions that are less conservative, they tend to avoid suboptimal investment decisions, such as over-investment of FCF, compared to their counterparts.

Aim: In this study, we examine the changes in default risk of the bidder over the course of a merger or acquisition. The data set consists of 531 deals in which the acquirers are European firms. We employ a general set of determinants to analyse the change in default risk and extend the literature by providing new empirical evidence for the European capital market.
 Research design: Abnormal returns are analysed to provide preliminary insights into the merger induced valuation effects. All hypothesized relationships on the changes in default risk are tested via a regression analysis. We differentiate these results further by analysing which factors determine the increase in default risk.
 Findings: Previous research on this issue reported mixed results. The main finding of our empirical analysis is that, on average, mergers and acquisitions of European bidders significantly increase default risk during the post-merger period.
 Originality: This study adds to the mergers and acquisitions literature for European bidders and targets. The empirical findings suggest that some observed relationships and determinants are different in Europe than in the United States.
 Implications: This research introduces a default risk model that could be applied to predict bidder performance subsequent to a merger or acquisition by analysing possible changes in default risk of the bidder. It also provides some possible explanations for the average increase in default risk. This study may help practitioners to better assess the potential risks when acquiring other firms.
 Key words: mergers & acquisitions, abnormal returns, default risk, Europe
 JEL Codes: G32, G34

THE theory of the economies of scale is the theory of the relationship between the scale of use of a properly chosen combination of all productive services and the rate of output of the enterprise. In its broadest formulation this theory is a crucial element of the economic theory of social organization, for it underlies every question of market organization and the role (and locus) of governmental control over economic life. Let one ask himself how an economy would be organized if every economic activity were prohibitively inefficient upon alternately a small scale and a large scale, and the answer will convince him that here lies a basic element of the theory of economic organization. The theory has limped along for a century, collecting large pieces of good reasoning and small chunks of empirical evidence but never achieving scientific prosperity. A large cause of its poverty is that the central concept of the theory-the firm of optimum size-has eluded confident measurement. We have been dangerously close to denying Lincoln, for all economists have been ignorant of the optimum size of firm in almost every industry all of the time, and this ignorance has been an insurmountable barrier between us and the understanding of the forces which govern optimum size. It is almost as if one were trying to measure the nutritive values of goods without knowing whether the consumers who ate them continued to live.

Purpose: Brand equity and customer equity are inextricably linked. Some authors propose that marketing activities build these intangible assets simultaneously. In contrast, others suggest that brand equity is an antecedent of customer equity. In this research, we aim to shed light about the relationship between brand equity and customer equity, by empirically testing these two alternative explanations. Design/methodology/approach: We propose four research models that reflect these two alternatives explanations regarding the link between brand equity and customer equity. In order to estimate these models we employ Structural Equations Modelling. We measure model variables using data collected through a survey to marketing managers of services companies that operate in Spain. We compare these four research models in terms of explanatory power and goodness of fit. Findings: Our results indicate that the models that correspond to the simultaneity approach have a higher explanatory power and goodness of fit than the models that suggest that brand equity is an antecedent of customer equity, thus supporting that these intangible assets are built by marketing activities at the same time. Research limitations/implications: Our results recommend caution when interpreting previous research about the effects of brand (customer) equity, as they might indeed correspond to customer (brand) management. Similarly, future research focusing on customer and brand management need to take into account both managerial areas in their studies. Practical implications: From a practitioners’ point of view, our findings suggest adopting a brand-customer portfolio approach to enhance company profitability. Similarly, we derive implications for firm valuation processes, which incorporate brand equity and customer equity in their calculations. Originality/value: We empirically study the relationship between brand equity and customer equity, while previous research has analyzed this topic only at a theoretical level. Clarifying this link enriches our comprehension about how companies build these marketing intangible assets and increases the accuracy of firm valuation processes.

PurposeThe study aims to identify critical factors that influence football fans’ support of their favorite team by examining the impact of social responsibility, brand credibility and team brand equity on patronage intentions of professional football teams.Design/methodology/approachAn online survey collected data from 331 football fans of the Persian Gulf Premier League (PGPL) in Iran. The data were analyzed using partial least squares structural equation modeling (PLS-SEM).FindingsThe findings revealed that corporate social responsibility (CSR) is able to influence brand equity, brand credibility and patronage intentions. Also, brand equity and brand credibility were found to be positively related to patronage intentions. In addition to that, the findings show that brand equity and team credibility partially mediate the relationship between CSR and patronage intentions.Practical implicationsThe findings provide valuable insights to sports teams/club managers aiming to attract new fans and retain current ones by investing in CSR and enhancing brand credibility and equity. Strategies to integrate CSR into relationship marketing and brand management are outlined.Originality/valueThis study empirically highlights the critical role of adhering to CSR and the effects of brand credibility and equity in enhancing patronage intentions among football team fans.

Purpose– The lessons and merits of changes in the recognition and disclosure of derivative instruments and hedging activities are still debated and are a major policy issue. Prior studies provide mixed evidences on the economic consequences of mandatory derivative instruments ' recognition and disclosure. This paper aims to provide empirical evidence on the impact of mandatory derivative instruments ' recognition and disclosure on managers’ risk-management behavior. More importantly, this paper aims to investigate the role of product market competition on the impact of mandatory derivative instruments ' recognition and disclosure on managers’ risk-management behavior.Design/methodology/approach– This paper tests the author ' s hypotheses using the fixed-effects estimation technique, where it includes firm dummies in all the regressions. This approach enables to control for unobserved firm effects (fixed effects) on firms’ risk-management behavior that are assumed to be constant through time but vary across firms.Findings– The author finds that mandatory recognition and disclosure of derivative instruments and hedging activities, on average, decreases firms’ market rate risk exposure. This finding suggests that after the implementation of the recognition and disclosure of derivative instruments and hedging activities required by Statement of Financial Accounting Standards No. 133 (SFAS 133), firms engage in more prudent risk-management activities to mitigate the potential cost of earnings volatility imposed by the standard. However, the decrease in market rate risk exposure is lower when the level of product market competition is higher. This finding is consistent with the idea that the recognition and disclosure of derivative instruments and hedging activities required by SFAS 133 unintentionally forces firms in competitive industries to engage in significant risk-taking. The result suggests that more disclosure in risk management may change risk-management incentives in undesirable ways if firms face the threat of entry in their product markets.Practical/implications– The results provide a new understanding on the role of product market competition on the effectiveness of mandatory derivative instruments ' recognition and disclosure. The findings imply that standard setters should take product market competition into consideration before making derivative instruments and hedging activities ' recognition and disclosure mandatory for all firms.Originality/value– The paper contributes to the accounting literature by providing a new insight into the moderating role of product market competition in the accounting recognition and disclosure regulation and firms’ reporting behavior relation. Moreover, the paper extends the current literature on the effects of SFAS 133 on risk-management activities and sheds light on the impact of accounting regulations on firms’ real economic behavior.

The reported research examines the impact of product portfolio labeling strategies on brand reputation and equity. A netnographic approach allowed to observe winery portfolio labeling approaches and create a typology of winery labeling strategies. Expert evaluation served to assess the dependent variable brand equity by deploying a regression analysis. For the observed wine industry, being part of the food industry, creating consistent and recognizable brands has a direct relevance for reducing (sustainability-related) food information overload and thereby building sustainable brand equity. The results uncover the relative importance of each of the six identified labeling strategies as well as their impact on reputation and brand equity creation. The results point to the need to establish a consistent, strategically founded product communication. Such an approach, with a positive effect on reputation building can serve to build sustainable brand equity. “Stuck in the middle”-type strategies apparently diminish winery brand equity exploitation. The findings contribute to the knowledge on food labels in product communication strategies and their impact on organizational brand equity, thereby having high relevance for the implementation of environmental certification initiatives in an organizational context. The article deploys a novel research approach in an under-researched area to provide new insights for further research as well as implications for practice.

Corporate cash holding is among the fundamental areas in corporate finance. Recently, corporate cash holding has gained critical attention due to the dynamic business environment. Both practitioners and academicians have focused on the firms’ cash holding decisions in the recent era. The purpose of this research is to investigate the effect of corporate governance on cash holding and to check the role of product market competition on corporate governance and cash holding relationship. The research investigated that whether product market competition plays substitution role for corporate governance in a relationship with cash holding. Substitution effect argument claims that external market discipline is enough to resolve agency problem between managers and shareholders even firm level governance is weak. For this study, unbalanced panel data of 196 companies from the year 2006 to 2014 is selected. All models include time dummies and industry fixed effect with standard error cluster to the firm. The results show that corporate governance has a significant negative effect on corporate cash holding which supports flexibility hypotheses. Moreover, product market competition has substitution role for corporate governance in relationship with corporate cash holding.

PurposeThis study empirically investigates the role of product market competition and mature-stage firm life cycle on the relation between corporate social responsibility (CSR) and market performance in an emerging market context – Malaysia.Design/methodology/approachThe authors construct a comprehensive CSR index toward the economy, environment and society (EES) and apply both Ordinary Least Squares (OLS) and Two-Stage Least Squares (2SLS) instrumental variables (IV) approaches to test the hypotheses of the study.FindingsThe authors find that EES-based CSR generally enhances firms' market performance; however, the level of product market competition undermines the market performance of socially and economically responsible firms. In addition, the study results indicate that mature-stage firm life cycle with more involvement in CSR activities shows better market performance. However, the endogeneity check of CSR suggests that both CSR and mature-stage firms are mutually exclusive in influencing market performance. The study findings are robust to alternative measures and different identifications of high and low default risk situations of sample firms.Practical implicationsThis study carries practical policy implications for the listed firms, regulators and stakeholders in general. For example, regulatory bodies may promote greater involvement in CSR activities by listed companies in the Malaysian stock market. Investors and other market participants should be aware of factors influencing socially responsible firms' market performance such as the corporate life cycle and the level of competition in product markets.Originality/valueThis research work responds to the call of regulatory bodies in Malaysia at a time when the Malaysian economy is under threat of environmental distraction practices by the palm oil industry and import ban by the largest export market, i.e. the European Union by 2030. The study also contributes to the theoretical literature by refining the moderating role of product market competition and mature-stage life cycle on the relationship between CSR and market performance from the perspectives of resource-based and stakeholder theories in emerging economy settings.

<p>This study investigates two capital markets effects of auditor provided tax services (APTS), a particular form of auditor provided non-audit services (APNAS). Firstly, this study examines the influence of APTS on income shifting by United States of America (U.S.) multinational companies and, secondly, this study examines the impact of APTS on default risk of all U.S. companies. There are two competing hypotheses on the impact of APNAS on the quality of the work of auditors and the empirical evidence is mixed. One strand of literature suggests that APNAS provide knowledge spillover effects and thus improve the quality of the work of the auditor. The other strand of literature suggests that APNAS impair the independence of the auditor and therefore lead to a decrease in the quality of the audit. APNAS may thus increase or decrease the value of audit as a governance mechanism. The U.S. Securities Exchange Commission (SEC) has banned several previously allowed APNAS such as bookkeeping, financial information systems design and implementation, appraisal and valuation, and internal audit. However, the SEC continues to permit auditors to provide tax services. This study extends the literature on APNAS by examining the effect of APTS on income shifting by multinational companies and on default risk. Using a sample of 10,248 firm-year observations on U.S. multinationals over the period 2002 – 2015 and the income shifting measurement model developed by Dyreng and Markle (2016), this study finds that APTS reduce outbound income shifting, which is consistent with knowledge spillover rather than impairment of independence. The result holds after addressing potential endogeneity concern and is robust to excluding observations from the financial crisis periods. Furthermore, the result holds after including firm-specific characteristics as influences on the income shifting parameters. Using a sample of 21,364 firm-year observations on U.S. firms over the period 2003 – 2016, this study finds that APTS have a positive relationship with default risk, consistent with impaired independence of the auditor. The result holds after addressing potential endogeneity concern and is robust to excluding the global financial crisis period. The effects of APTS on income shifting and default risk are therefore opposite in direction. However, the positive relationship between APTS and default risk is weaker for firms with high institutional holdings and a strong information environment, indicating that stronger corporate governance mitigates the impact of APTS on default risk. Furthermore, this study finds that the channel for the effect of APTS on default risk appears to be earnings quality. That is, APTS lower audit quality, thereby lowering earnings quality and increasing default risk. Given the cost of default, this is an important finding. Thus, taking the results on income shifting and default risk in combination, the question of the SEC continuing to permit auditors to provide tax services is left open to question.</p>

<p>This study investigates two capital markets effects of auditor provided tax services (APTS), a particular form of auditor provided non-audit services (APNAS). Firstly, this study examines the influence of APTS on income shifting by United States of America (U.S.) multinational companies and, secondly, this study examines the impact of APTS on default risk of all U.S. companies. There are two competing hypotheses on the impact of APNAS on the quality of the work of auditors and the empirical evidence is mixed. One strand of literature suggests that APNAS provide knowledge spillover effects and thus improve the quality of the work of the auditor. The other strand of literature suggests that APNAS impair the independence of the auditor and therefore lead to a decrease in the quality of the audit. APNAS may thus increase or decrease the value of audit as a governance mechanism. The U.S. Securities Exchange Commission (SEC) has banned several previously allowed APNAS such as bookkeeping, financial information systems design and implementation, appraisal and valuation, and internal audit. However, the SEC continues to permit auditors to provide tax services. This study extends the literature on APNAS by examining the effect of APTS on income shifting by multinational companies and on default risk. Using a sample of 10,248 firm-year observations on U.S. multinationals over the period 2002 – 2015 and the income shifting measurement model developed by Dyreng and Markle (2016), this study finds that APTS reduce outbound income shifting, which is consistent with knowledge spillover rather than impairment of independence. The result holds after addressing potential endogeneity concern and is robust to excluding observations from the financial crisis periods. Furthermore, the result holds after including firm-specific characteristics as influences on the income shifting parameters. Using a sample of 21,364 firm-year observations on U.S. firms over the period 2003 – 2016, this study finds that APTS have a positive relationship with default risk, consistent with impaired independence of the auditor. The result holds after addressing potential endogeneity concern and is robust to excluding the global financial crisis period. The effects of APTS on income shifting and default risk are therefore opposite in direction. However, the positive relationship between APTS and default risk is weaker for firms with high institutional holdings and a strong information environment, indicating that stronger corporate governance mitigates the impact of APTS on default risk. Furthermore, this study finds that the channel for the effect of APTS on default risk appears to be earnings quality. That is, APTS lower audit quality, thereby lowering earnings quality and increasing default risk. Given the cost of default, this is an important finding. Thus, taking the results on income shifting and default risk in combination, the question of the SEC continuing to permit auditors to provide tax services is left open to question.</p>

Does the source of debt financing affect default risk?

This paper employs a general equilibrium model with heterogeneous firms to analyze the effect of default risk on production-generated pollution emissions. The model analytically divides the effect of default risk into three distinct effects: the market-size, technology-upgrading, and selection effect. Conceptually, an increase in default risk raises equilibrium borrowing costs, thereby precluding investment in a technology upgrade among a subset of firms (technology-upgrading effect). As a consequence, the economy consists of more numerous (market-size effect) but less productive and more pollution-intensive firms (selection effect). Because the effects are confounding in nature, the effect of default risk on aggregate pollution emissions and emissions intensity is an empirical question. To answer this question, this paper estimates the model’s key parameters using a unique dataset with establishment-level credit scores and a composite measure of pollution emissions for a panel of manufacturing firms in the United States. Using a two-step procedure where default risk is estimated in the first stage, the results indicate that the estimated elasticity of emissions intensity and productivity with respect to default risk is 0.89 and − 0.16, respectively. Next, I use the theoretical model to leverage the coefficient estimates to estimate the effect of economy-wide default risk on aggregate pollution emissions, demonstrating that default risk increases aggregate emissions and emissions intensity, primarily as a consequence of the technology-upgrading effect. Finally, this paper demonstrates that historical changes in economy-wide default risk can generate economically significant changes in pollution emissions.