Australian Firms Research Articles

Walking the talk(s): Organisational narratives of integrated reporting

Purpose – The purpose of this paper is to explore how the managers of early adopting Australian firms contribute to the institutionalisation of integrated reporting (IR). Design/methodology/approach – This study is situated within institutional theory. The authors undertook semi-structured interviews with 23 Australian managers. The authors drew on Gabriel's (2000) poetic analytics to show how the sensemaking activities of the early adopters contribute to the institutionalisation process. Findings – Two main narratives dominate our managers’ experience: IR as story-telling and IR as meeting expectations. These two narratives are constructed simultaneously and theyset up contrasting plots regarding salient events, responsibilities and characters that are resolved through one or more of three “inter-narratives” that background these tensions. The inter-narratives suggest time, the company's strategy, and talking and engagement can solve problems. Research limitations/implications – The authors argue that th...

Returns to Acquirers of Listed and Unlisted Targets: An Examination of Australian Bidders

We analyze the market reaction to the announcement of takeover bids initiated by Australian public firms on private and public targets. The results show that acquirers of private targets benefit from a significantly higher share price reevaluation. This so-called listing effect is broad-based and persistent. It does not appear to depend on whether the target is large or small; whether it is related or not to the bidder’s industry; whether it is domestic or cross-border; and whether it is in the resources sector or not. We find only minor evidence that bidder returns might be stronger for larger acquisitions of private targets; for targets in the resources sector; and in subdued market conditions such as in the wake of the global financial crisis. In addition, our selection model suggests that endogenous choice of target is unlikely to have produced biased results. Overall, our findings are supportive of the view that market frictions contribute to make private firms attractive targets.

An Empirical Investigation on CEOs' Option Incentives and Firmss Risky Financing Policy: Evidence from Australian Public Companies

In order to align executives’ interests with shareholders’ interests, board of directors has rewarded executives with more option-based payments in the past decades. However, as volatility of share return increases, CEOs are more risk averse because their human capital and wealth are undiversified. Consequently, CEOs may pass up risky but value-enhancing corporate policy decisions. High pay-equity risk sensitivity (vega) CEOs are hypothesised to have more incentive to adopt more risky corporate policy, given that the volatility of the underlying share increases option value in Black-Scholes option pricing model.This study investigates the effect of vega on firm’s book leverage and vega determinants based on a panel data of 137 Australian firms from 2003 to 2012, a period in which the federal government implemented a series of executive pay reforms to tie the pay more closely to performance. The results show that vega has a significant and positive effect on firm’s leverage. In addition, the results demonstrate that there is a negative and statistical significant association between vega and CEOs’ risk-aversion such as the option moneyness and cash compensation. This study also provides evidence that firm size has a significantly positive effect on firms’ debt financing. Furthermore, in-the-money options and executive cash compensation have significant and negative impact on vega.

Openness and Appropriation: Empirical Evidence From Australian Businesses

The adoption of open innovation creates a dilemma for firms. On one hand, a commitment to openness facilitates the flow of knowledge between firms, with this flow (generally) unconstrained by royalties and other appropriation mechanisms. However, openness has also led to unintended knowledge spillovers, limiting firms' abilities to protect their core knowledge. This dilemma has created a need to consider the relationship between openness and firms' appropriability regimes. In order to explore this “paradox of openness,” an investigation of the appropriability regimes adopted by Australian firms through an empirical analysis of innovation-related data from 4 322 businesses was undertaken. It was found that the relationship between two indicators of openness (the breadth of external knowledge sources and the scope of interorganizational collaborations) and the scope of appropriability regimes employed by a firm exhibits a nonlinear inverse-U (∩) form. The results also indicated that open innovators actually increase controls on their intellectual property through informal appropriability regimes rather than loosening appropriability mechanisms to promote knowledge spillovers as open innovation theories suggest.

Factors influencing on-market share repurchase decisions in Australia

Purpose – The purpose of this study is to examine factors influencing decisions to repurchase shares on-market in Australia. The present study also examines the role of board size, board independence and chief executive officer duality on the decision to repurchase shares on-market by Australian firms. Design/methodology/approach – This study blends the traditional motivations of share repurchases with the influences of governance. The sample consists of all non-financial firms included in the Australian All Ordinaries Index (AOI) for the period 2004-2010. The repurchase sample consists of 104 repurchases undertaken by 62 firms. A probit panel model is used to analyse the decision to repurchase shares on the market. To account for unobserved heterogeneity, random effects panel models are also used. Findings – Analyses of a sample of non-financial firms included in the AOI for the period 2004-2010 show that size is significantly positively correlated with the decision to repurchase shares, thus supporting the agency cost. Findings also support the undervaluation and signalling hypotheses. Similarly, there is evidence in support of the view that firms repurchase shares to reach their target optimal capital structure. The present study also finds a significant positive association between board independence and the decision to repurchase shares in Australia. Research limitations/implications – On-market share repurchases help firms to signal their future growth opportunities and resolve agency conflicts. Signals from repurchases also help markets discover the true fundamental values of firms. Governance plays an important role in improving the effectiveness of on-market share repurchases, as independent directors provide both monitoring and discipline which helps to ensure that firms have valid motivations in undertaking share repurchases. Practical implications – These findings have implications for capital restructuring and governance policies. Principle-based governance frameworks that prevail in countries like Australia work as well as rule-based governance. Originality/value – This study highlights the complementary roles that financial policies and corporate boards play in corporate governance. Independent boards ensure that firms pursue appropriate financial policies that help resolve agency conflicts and information asymmetry problems.

Does consistency in management control systems design choices influence firm performance? An empirical analysis

This study examines the impact on firm performance of theoretically consistent relationships between three management control systems (MCS) design choices – delegation, performance measurement, and incentive compensation. Based upon the ‘three-legged stool’ model and agency theory, the hypothesis is that theoretically consistent MCS design choices are associated with enhanced firm performance. Using survey data from large Australian firms, the findings support the hypothesis, suggesting that an appropriate MCS design is a determinant of firm performance. The study contributes to the literature by moving beyond a focus on the antecedents of the three key MCS design choices to the consequence of alignment of those choices.

Interest rate, size and book-to-market effects in Australian financial firms

The Fama–French three-factor model (1993) has been extensively used to study the pricing of nonfinancial stocks. This study provides the first examination of the pricing of Australian financial stocks using the Fama–French framework. The four-factor model (market, size, book-to-market and momentum) augmented with the level, slope and curvature of the interest rate term structure is used to examine the pricing of Australian financial stocks. The interest rate factors have not been previously considered for pricing Australian stocks within the Fama–French framework. Consistent with US evidence, we use a system-based estimation to show that the size and book-to-market factors are not priced in the cross section of the equity returns of Australian financial stocks. Momentum and term spread are priced in the equity returns of both financial and nonfinancial stocks. These findings are robust to the inclusion of control variables such as default spread, the inflation rate and a dummy variable for the global financial crisis.

Internationalization to China: A Model for Australian Architectural, Engineering and Construction Firms

The experiences of an architectural, an engineering, and a construction organization, when internationalizing to China, are compared to extant theories of internationalization to develop an enhanced explanation of these organizations’ internationalization. The research examines the explanatory power of both the Uppsala internationalization model and network theory for internationalization. The research determined that, whilst these organizations utilized an incremental internationalization process, the stages differed from those identified in the Uppsala model. Part of this difference reflects the fact that the participants are service organizations and the Uppsala model is more relevant to manufacturing organizations. Network theory was also found to predict some of the participant behaviors; however, it did not correctly predict the reasons for forming partnerships, which was to gain knowledge rather than develop networks. The stages of the internationalization into China identified were: (1) experiencing a motivation to internationalize; (2) adopting one of a variety of entry modes; (3) experiencing a motivation to increase internationalization to the level of a wholly-owned foreign entity; (4) establishment of a wholly-owned foreign entity (WOFE), either by acquisition or development; and (5) further horizontal expansion (such as movement to new locations). A range of different motivations for both stages one and three were identified.

A COMPARISON OF THE FINANCIAL CHARACTERISTICS OF JAPANESE AND AUSTRALIAN MANUFACTURING FIRMS

ABSTRACT In this paper, we compare the financial characteristics of Japanese and Australian manufacturing firms with the MANOVA (Multivariate Analysis of Variance) technique. Our empirical findings indicate that the overall financial characteristics of Japanese and Australian manufacturing firms are significantly different. Japanese firms have more efficient inventory management compared with Australian firms. However, Australian firms have more efficient accounts receivable management compared with Japanese firms. Japanese firms have more liquidity, therefore they have less technical insolvency risk, compared with Australian firms. Australian firms generate more sales per dollar of investment in fixed assets and they achieve a higher total assets turnover and annual sales growth rate compared with their Japanese counterparts. Return-on-assets is higher in Australian firms than in Japanese firms. However, return-on-equity is not significantly different in the two countries. Keywords Japanese manufacturing Firms, Australian Manufacturing Firms, Financial Characteristics, Multivariate Analysis of Variance (MANOVA)

Carbon Management Systems and Carbon Mitigation

This article proposes a carbon management system (CMS). The system comprises 10 essential elements from four broad perspectives: carbon governance, carbon operation, emission tracking and reporting, and engagement and disclosure. The proposed new approach focuses on cross‐functional integration, enforcement of proactive strategies and group rather than individual accountability. We then use Carbon Disclosure Project reports to examine empirically the implementation of systems by large Australian firms. Overall, we find that firms with higher quality CMS have achieved better carbon mitigation. Further, adequate assessment of carbon risk and opportunity, the presence of reduction targets, the strength of carbon programs and enhanced external disclosures appear to be the most effective elements in our sample firms. We present evidence that, by combining governance, internal process, carbon dioxide‐footprint tracking and communication activities, a CMS helps managers improve decision making. We discuss the implications of the findings for accounting practice and education.

Safety in machinery design and construction: Performance for substantive safety outcomes

This paper presents the findings of qualitative research which examined how manufacturers addressed safety matters in the course of designing and constructing machinery, and the factors shaping their responses. This topic was investigated in 66 Australian firms that supplied machinery into local and international markets. Based on in-depth interviews, observation of machinery and review of documentation, firm performance was evaluated for three substantive safety outcomes – hazard recognition (types and instances), risk control measures (type and quality) and provision of safety information (scope and quality). The paper discusses differences in firm performance for these outcomes and concludes that there is a need for greater and more effective attention to safety in machinery design and construction, in order to advance the goal of preventing death, injury and illness arising from machinery.

Firms' compliance with the disclosure requirements of IFRS for goodwill impairment testing

Purpose – This study aims to examine the impact of the 2008-2009 global financial crisis (GFC) on Australian firms' compliance with IFRS 36/AASB 136 for goodwill impairment testing. It also examines the factors associated with the cross-sectional variations in the compliance levels. Design/methodology/approach – Based on a survey of disclosure notes in companies' annual reports, firm-level compliance scores were developed and further analysed applying quantitative statistical methods. Findings – The findings suggest that firms' compliance has increased during the GFC compared to the PCP. There was no significant intra-period change in the compliance levels during the PCP. Firms belonging to goodwill intensive industries show greater compliance levels than firms in other industries. Audit quality is also a significant determinant of firms' compliance with IFRS for goodwill impairment testing. Goodwill intensity is a significant determinant of firms' compliance level during the GFC but not during the PCP. Firm size is associated with the compliance levels when the industry effects are not controlled for. When the industry effects are controlled for, the effect of size on firms' compliance levels disappears. Profitability is also associated with firms' compliance with IFRS for goodwill impairment testing. However, firms' leverage ratio is not significantly associated with compliance levels. Originality/value – This is the first known study to examine the issue of compliance with IFRS for goodwill impairment testing in the context of the GFC and the PCP.

Which governance characteristics affect the incidence of divestitures in Australia?

Event studies indicate that divestitures create shareholder value. However, managers are generally disinclined to execute a divestiture due to their inherent preferences for growing the firm’s assets. Governance structures can play a significant role in restraining this agency conflict. Using a sample of divestitures carried out by Australian firms over a recent 10-year period, we find that board compensation and ownership concentration increase the likelihood of a divestiture. In addition, board compensation has a stronger effect in firms that are more likely to divest, while larger boards inhibit divestitures in firms that are less likely to divest. Our analysis involves a propensity score matching method. We show that poor matching can lead to large biases and inconsistencies.

Integration of carbon risks and opportunities in enterprise risk management systems: evidence from Australian firms

This study addresses managerial perceptions of risks and opportunities related to carbon pricing and emission management, and the factors that affect the extent to which carbon-related risks and opportunities are integrated into the organisation's formal enterprise risk management (ERM) system. We assess the role played by internal governance features, resource availability, managerial perceptions on competitive pressures, and industry type on the inclusion of carbon risks within the ERM system. Based on survey responses from 96 senior managers in Australian carbon intensive firms (i.e. firms listed in the 2009 Publication of Data under Section 24 of the National Greenhouse and Energy Reporting (NGER) Act 2007), we find that the extent of carbon risk integration is positively associated with the existence of a formal carbon strategy, senior management involvement, internal audit oversight, resource (personnel and funds) availability and energy sector membership. The paper also provides several insights into the perceptions of risks and opportunities confronting an organisation as a result of carbon pricing mechanism.

Dynamic forecasts of financial distress of Australian firms

Dynamic forecasts of financial distress have received far less attention than static forecasts, particularly in Australia. This study, therefore, investigates dynamic probability forecasts for Australian firms. Novel features of the modelling are the use of time-varying variables in forecasts from a Cox model. Not only is this one of relatively few studies to apply dynamic variables in forecasting financial distress, but to the authors’ knowledge it is the first to provide forecasts of survival probabilities using the Cox model with time-varying variables. Forecast accuracy is evaluated using receiver operating characteristics curves and the Brier Score. It was found that the dynamic model had superior predictive power, in out-of-sample forecasts, to the traditional Cox model and to the logit model.

Determinants of tax haven utilization: evidence from Australian firms

AbstractThis paper examines the major determinants of tax haven utilization based on a sample of 200 publicly listed Australian firms, over the 2006–2010 period (1,000 firm‐years). Our regression results show that variables relating to transfer pricing, intangible assets, an interaction term between transfer pricing and intangible assets, withholding taxes, performance‐based management remuneration and multinationality are positively associated with tax haven utilization. We also find that corporate governance structures are negatively associated with tax haven utilization. The magnitude and significance of the regression coefficients indicate that transfer pricing, withholding taxes, intangible assets, an interaction term between transfer pricing and intangible assets, corporate governance and multinationality are the most important drivers of tax haven utilization.

No puzzle: The foreign exchange exposure of Australian firms

In this paper we analyze the constant and time-varying influence of currency movements on the value of Australian firms listed on the S&P/ASX 100 index for a period from 1980 to 2010 using daily, weekly, monthly and quarterly returns. Whilst the constant exposure model provides only weak evidence over the full sample period the time-varying exposure analysis reveals that most firms are exposed to currency movements in some periods. The exchange rate exposure of Australian firms is dependent on the appreciation or depreciation trajectory of the Australian dollar and on the sample frequencies used. The positive average FX exposure is consistent with the structure of the Australian economy, the size of the mining sector and the role of the Australian dollar as a commodity currency. Finally, we argue that our findings are fully consistent with financial theory and do not constitute a puzzle.

Toward a multilateral framework for identifying national security threats posed by foreign acquisitions: with special reference to Chinese acquisitions in the United States, Canada, and Australia

This article presents a framework for differentiating between foreign acquisitions of companies that might plausibly pose a national security threat to the home country of the target acquisition and those that do not. This framework originally derives from the experience of the United States. The framework is then shown to be relevant and useful for foreign acquisitions in Canada and Australia. In each case, Chinese acquisitions of US, Canadian, or Australian firms are highlighted. The article concludes by arguing that this framework can serve as an effective nondiscriminatory basis for separating genuine from implausible national security threats from foreign acquisitions across OECD states, to include all countries around the world.

What motivates block share ownership?

Diffuse share ownership is not as pronounced in the U.S. as many would assume. This has led to a body of research examining large shareholders, or blockholders. Issues addressed include whether firms with a blockholder perform better or worse than widely-held firms; whether firms with a blockholder pay their executives differently to widely-held firms; and whether the presence of a blockholder increases or decreases the incidence takeovers. Another issue, which this paper explores, is what motivates block share ownership. Bebchuk (1999a, 1999b) develops a model which predicts that a firm is more likely to have a controlling blockholder if the anticipated private benefits of control at that firm are comparatively large. This paper examines the factors associated with ownership structure among publicly traded Australian firms. Our results indicate that private benefits of control are a significant factor in explaining the differences in ownership structure among Australian firms. As importantly, we also find that the relationship between the existence of a blockholder and private benefits of control is endogenous. That is, the presence of a controlling blockholder strongly influences the prevalence of these private benefits of control.

Applying the materiality concept: The case of abnormal items

Materiality is a key concept in accounting theory and practice. Yet differing views exist in regard to the practical application of the materiality concept amongst preparers, auditors, users of financial reports and regulators (ESMA/2011/373). Unlike International Accounting Standards, in Australia AASB 1031 Materiality addresses materiality thresholds. The pre-2000 period, when Australian firms were required to separately disclose abnormal items in their financial reports, provides a unique opportunity to explore how the concept of materiality was applied. Abnormal items were considered abnormal by reason of their size and effect on operating earnings. We investigate whether immaterial or marginally material items were classified as abnormal, and whether materiality thresholds were consistently applied to different types of abnormal items and over time. Findings show almost a quarter (22.94%) of abnormal items were immaterial for which the overall mean was only 2.54% of the baseline earnings before abnormal items. Results are consistent when abnormal items are classified into the four predominant types by which described in financial reports and when further dissected into the forty categories by which they were themed. The outcomes of this analysis inform the current regulatory debate concerning the inclusion of immaterial items in financial reports which may mislead users (FRRP 2013) and the IASB materiality project (2013).