Canadian Firms Research Articles

Reconsidering the impact of environmental, social and governance practices on firm profitability

PurposeThis paper investigates the relationship between commitment to ESG practices and firm performance using a synthetic index based on ESG disclosure and ESG performance scores.Design/methodology/approachUsing the Mazziotta-Pareto aggregation method, we develop a novel synthetic index of ESG engagement based on ESG rating and disclosure. This index is employed in a dynamic panel regression, implemented using the Arellano-Bond estimator, to explain profitability in a sample of 146 listed Canadian firms over the period spanning from 2014 to 2021.FindingsESG practices may either foster or hinder firm performance. In particular, a synergy emerges between the social and environmental dimensions of ESG practices, shedding light on the relevance of high standards in terms of environmental and social activities.Practical implicationsThe study emphasizes the significance of acknowledging the various facets of ESG engagement and the necessity of transcending the current constraints of accessible ESG data and ratings. Synthetic indices combining different types of ESG information may contribute to mitigating the problems created by strategic disclosure on the part of firms, which typically results in undesirable practices such as greenwashing and social washing.Originality/valueThis is the first study that applies the Mazziotta-Pareto method to develop a synthetic index of ESG engagement, tackling each pillar separately. Moreover, when investigating the effect of ESG engagement on profitability, we allow for cross-pillar synergies and/or trade-offs.

The effect of the Tax Cuts and Jobs Act of 2017 on corporate investment

This study examines the impact of the Tax Cuts and Jobs Act of 2017 (TCJA) on U.S. corporate investment. We examine U.S. firms and compare them to Canadian firms from 2010 to 2019 in a multivariate firm fixed-effects difference-in-differences analysis. Our results indicate that investment increases for U.S. firms relative to Canadian firms after the tax cuts. We also find that capital intensive and financially constrained firms increase investment the most. We explore how the TCJA impacted firm payouts and find some evidence that the tax cuts are associated with increased dividends. The paper contributes to the literature by providing evidence on the effects of the TCJA on corporate investment which have been debated extensively by politicians, journalists, tax policy experts, and academics.

The impact and adoption of emerging technologies on accounting: perceptions of Canadian companies

PurposeThis study aims to focus on the five most relevant and discursive emerging technologies in accounting (cloud computing, big data and data analytics, blockchain, artificial intelligence (AI) and robotics process automation [RPA]). It investigates the adoption and use of these technologies based on data collected from accounting professionals in a technology-developed country – Canada, through a survey.Design/methodology/approachThe study investigates the adoption and use of emerging technologies based on data collected from accounting professionals in a technology-developed country – Canada, through a survey. This study considers the said nature and characteristics of emerging technologies and proposes a model using the factors that have been found to be significant and most commonly investigated by existing prior technology-organization-environment (TOE)-related technology adoption studies. This survey applies the TOE framework and examines the influence of significant and most commonly known factors on Canadian firms’ intention to adopt the said emerging technologies.FindingsStudy results indicate that Canadian accounting professionals’ self-assessed knowledge (about these emerging technologies) is more theoretical than operational. Cloud computing is highly used by Canadian firms, while the use of other technologies, particularly blockchain and RPA, is reportedly low. However, firms’ intention about the future adoption of these technologies seems positive. Study results reveal that only the relative advantage and top management commitment are found to be significant considerations influencing the adoption intention.Research limitations/implicationsStudy findings confirm some results presented in earlier studies but provide additional insights from a new perspective, that of accounting professionals in Canada. The first limitation relates to the respondents. Although accounting professionals provided valuable insights, their responses are personal views and do not necessarily represent the views of other professionals within the same firm or the official position of their accounting departments or firms. Therefore, the exclusion of diverse viewpoints from the same firm might have negatively impacted the results of this study. Second, this study sample is limited to Canada-based firms, which means that the study reflects only the situation in that country. Third, considering the research method and the limit on the number of questions the authors could ask, respondents were only asked to rate the impact of these five technologies on the accounting field and to clarify which technologies are used.Practical implicationsThis study’s findings confirm that the organizational intention to adopt new technology is not primarily based on the characteristics of the technology. In the case of emerging technology adoption, the decision also depends upon other factors related to the internal organization. Furthermore, although this study found no support for the effect of environmental factors, it fills a gap in the literature by including the factor of vendor support, which has received little attention in prior information technology (IT)/ information system (IS) adoption research. Moreover, in contrast to most prior adoption studies, this study elaborates on accounting professionals’ experience and perceptions in investigating the organizational adoption and use of emerging technologies. Thus, the findings of this study are valuable, providing insights from a new perspective, that of professional accountants.Social implicationsThe study findings may serve as a guide for researchers, practitioners, firms and other stakeholders, particularly technology providers, interested in learning about emerging technologies’ adoption and use in Canada and/or in a relevant context. Contrary to most prior adoption studies, this study elaborates on accounting professionals’ experience and perceptions in investigating the organizational adoption and use of emerging technologies. Thus, the findings of this study are valuable, providing insights from a new perspective, that of professional accountants.Originality/valueThe study provides insights into the said technologies’ actual adoption and improves the awareness of firms and stakeholders to the effect of some constructs that influence the adoption of these emerging technologies in accounting.

Developing customer analytics capability in firms of different ages: Examining the complementarity of outside-in and inside-out resources

Customer analytics capability remains underdeveloped among firms despite its potential for enhancing competitiveness. Previous research has predominantly focused on inside-out organizational factors as drivers of customer analytics capability. This paper examines the role of outside-in resource, the complementarity between outside-in and inside-out resources, and their boundary conditions. Specifically, we study how customer orientation culture (an outside-in resource) complements data-driven culture (an inside-out resource) in firms of different ages to drive customer analytics capability and subsequently, firm performance. Using survey data obtained from Canadian firms, we find that customer orientation is not only positively related to customer analytics capability but also reinforces the effect of data-driven culture. We further find that the conditional effect of customer orientation becomes stronger as firm age increases. In particular, among older firms, the impact of data-driven culture is greatest when customer orientation is high, but it becomes nonsignificant when customer orientation is low. We also link these relationships to firm performance using mediation and moderated mediation analyses. Overall, the results suggest that achieving customer analytics excellence and resultant competitive performance requires marketing to continuously act as customer champions and advocate data analytics efforts to ensure the firm embraces an outside-in orientation.

State owned enterprises as multinational firms: the case of two power transmission firms in Canada and in India

ABSTRACT How do state owned enterprises behave when they have to perform as multinational firms? Do they respect their original mission or do they act like private multinational firms? The analysis of Hydro-Québec and Power Grid Corporation of India Limited, two companies transmitting electricity over the border and doing consultancy and investment in distant countries, shows the impact of share ownership and the nature of the top executives, as well as the role of the political environment and of the opportunities, taken or missed, in the process. The application of an analytical model reveals the complexity of such an unusual situation.

The impact of workforce practices on firms’ sustainability performance: An empirical study of Canadian listed firms

This study examines the impact of workforce practices on firms’ environmental and social performance. The mediating impact of firms’ financial performance and the moderating impact of firm age on workforce practices and environmental/social performance are also investigated. Data were collected through the Refinitiv database from a sample of 224 large, actively traded Canadian firms listed on the Toronto Stock Exchange (TSX). A linear regression model was used to test the effect of various workforce practices on firms’ environmental and social performance. The findings have important implications for the direct and indirect impacts of workforce practices on firms’ environmental and social performance. While the direct impact was found to be significant, firms’ financial performance was found to fully mediate the workforce-environment/social performance relationship. The findings also demonstrated that the impact of firm age on workforce practices and environmental/social performance via financial performance was significant. The study draws on the signaling theory to empirically investigate the contextual aspects that affect the association between various workforce practices and firms’ sustainability performance. The findings can be utilized by firms to select the right mix of practices to tailor workforce management and achieve better sustainability performance in their environmental and social initiatives.

Does economic liberalization foster corporate investment? Theory and evidence from US and Canadian firms

Prior studies have largely debated and demonstrated the positive effect of economic liberalization on economic growth, but they have not clarified how and to which extent economic liberalization affects corporate investment, the main driver of a country's economic growth. This paper investigates the relationship between economic liberalization and corporate investment by modelling the microeconomic channels through which economic liberalization affects corporate investment. Our theoretical framework extends the standard neoclassical model of firm value maximization to incorporate the effect of economic liberalization on corporate investment via several microeconomic channels. We test the theoretical predictions of our model by using a large and heterogeneous sample of non-financial US firms for the period 2000–2019. The empirical results support our hypotheses that economic liberalization positively affects corporate investment both directly and indirectly through different channels. These effects hold, although with different intensity, for all dimensions of economic liberalization.

Does Financial Performance in Firms Benefit from Sustainability Performance? The Mediating Effect of Governance on Firm Performance of Listed Firms in Canada

Relying on dynamic agency and stakeholder perspectives as theoretical underpinnings, this paper analyzes the mediating effect of board governance and operational governance in the relationship between sustainability and financial performance of firms. Using a sample of 224 large and actively traded Canadian firms listed on the Toronto Stock Exchange, the authors use the partial least squares-structural equation modeling (PLS-SEM) approach to analyze the data. The results show that there is a good fit between the data for both the measurement and structural equation models, and they further reveal partial mediation effects of board governance and operational governance singly and jointly as full mediation in the relationship between sustainability and financial performance of firms. The results are robust to controlling for various factors that affect firms’ sustainability and financial performance, such as firm type, firm age, and other industry-specific characteristics. This study provides valuable insights for corporate governance and sustainability scholars and practitioners that may allow them to link governance structures with sustainability for better financial performance outcomes, as well as to include an integrated sustainability focus into their competitive strategies.

The contribution of firm profits to the recent rise in inflation

We measure the contribution to inflation from the growth in markups of Canadian firms. The dynamics of inflation and markups suggest that changes in markups could account for less than one-tenth of inflation in 2021. Further, they suggest that peak inflation was driven primarily by changes in firms’ costs.

Does Wildfire Exposure Influence Corporate Disaster Preparedness? A Study of Natural Resources Extraction Firms in Canada

Managers must make critical disaster preparation decisions to protect firm assets from the threat of wildfire activity. Prior literature stresses the importance of past disaster experience as a key driver of disaster preparation. The article finds that, while experience with disasters is a critical condition, it is insufficient to explain disaster preparation activities by firms. Managerial perceptions including belief in anthropogenic climate change and the perception of increasing wildfires can substitute for direct negative wildfire experience. The article builds configural theory to explain how the psychological “closeness” of wildfire hazards can influence managerial decisions to prepare for disasters in the presence of key organizational characteristics. This study adopts a qualitative comparative analytical approach, drawing on manager surveys and biophysical wildfire data from 20 Canadian mining and resource extraction sites. The article also contrasts manager perceptions of wildfire risk with those of experts and captures a gap in risk perception.

How small companies capture value from their intellectual property: a qualitative study

Innovative small companies often struggle to profit from their intellectual property (IP) due to various constraints, a challenge that remains under-researched. In our analysis of seven Canadian firms, we illuminate the ways these businesses maximize IP value. In doing so, we proposed a nuanced, resource-based view (RBV) framework. This framework reveals that small business managers first evaluate resource deficiencies for specific IPs. Following this, they pinpoint and implement compensating strategies linked to organizational resources, distinct IP forms, and networks. Consequently, small firms can harness the full potential of IP by adeptly evaluating resource gaps and applying appropriate compensatory measures. Moreover, this study underscores that the value that small firms derive from IP depends on their capability to resolve deficiencies with effective strategies. These insights not only advance our understanding of IP value capture processes in small firms but also offer actionable guidance for businesses and policymakers aiming to bolster innovative ecosystems.

An emergent grounded theory of AI-driven digital transformation: Canadian SMEs’ perspectives

ABSTRACT Artificial intelligence (AI) empowers traditional firms to transform into Industry 4.0, enabling them to compete in an era of rapid technological advancements. However, AI adoption remains limited among Canadian firms. This research aims to identify the key dimensions of AI-driven digital transformation (AIDT) and develop a grounded theory that provides a rich and nuanced understanding of how the AIDT process unfolds within Canadian SMEs. The study reveals that the AIDT process is shaped by the interplay of five core dimensions: evaluating transformation context, auditing organisational readiness, piloting the AI integration, scaling the implementation, and leading the transformation. The first four dimensions follow a sequential, stage-like progression, while the fifth dimension is recurring and omnipresent, exerting a continuous impact on the other phases. AIDT is characterised as a path-dependent, slow evolutionary change spectrum that demands firms adapt by developing their sensing, seizing and reconfiguration capacities to evolve and sustain their evolutionary fitness. The study explores several theoretical and managerial implications that arise from the findings.

Reporting comprehensive income and firms' earnings management

This study investigates the impact of reporting comprehensive income and other income through performance or equity statements on firms' earnings management through the selective sale of available-for-sale (AFS) securities. The objective is to explore how Canadian firms can improve transparency by altering managers' accounting behavior by switching from equity statements to income statements. The study used a difference-in-differences method in a quasi-experimental framework. The results showed that negative net income and post-period net income in performance statements can reduce realized gains and losses. Available-for-sale securities also affect these gains and losses in performance and equity statements. Single statement adopters only smooth earnings when net income is positive or when available-for-sale gains are large enough to offset negative earnings. Income statement (IS) adopters reduced earnings smoothing more than other treatment firms. Managers with less job security were found to be more likely to engage in earnings smoothing, and earnings smoothing decreased more during the pre-to-post period. Equity incentives reduced the tendency to smooth earnings, particularly in treatment firms with CEOs whose pay is more sensitive to stock price changes. Treatment firms outperform control firms in predicting future earnings using realized gains and losses on AFS securities per share. The findings suggest that firms manage earnings less effectively by selectively selling AFS securities when comprehensive income (CI) or other comprehensive income (OCI) is presented in performance statements. Firms win when earnings management is reduced because it reduces the informativeness of realized gains and losses on AFS securities. Managers will use more earnings management strategies as long as they have incentives.

Financial statement comparability and the usefulness of earnings: Some Canadian evidence

In this study, we investigate whether financial statement comparability enhances the usefulness of earnings, specifically their relevance and faithful representation, as asserted in the International Accounting Standards Board (IASB)’s conceptual framework. Thus far, researchers have documented various capital market benefits of comparability. However, the role of comparability in improving the usefulness of earnings has not yet been directly examined. Our study is motivated to address this question using data from Canadian firms in the post-International Financial Reporting Standards (IFRS) adoption period. The findings are consistent with our prediction and support the IASB’s claim, indicating that comparability enhances the decision-usefulness of earnings. These results are robust to several control factors, including industry membership, firm profitability, firm size, and leverage.

Engagement partner identification format and audit quality

Exploiting the staggered adoption of three key regulations that implemented distinct engagement partner identification (EPI) formats for separate groups of Canadian firms over a 10‐year period, we investigate the association between eight audit quality proxies and three EPI formats: two indirect (auditor permit number in the report, Form AP) and one direct (partner name in the report). This unique setting not only enables us to examine the short‐term association between three different EPI formats and audit quality but also to investigate the long‐term association for one EPI format (auditor permit number). In the main analysis, out of 32 results of interest, only three are significant and indicate a positive association. Hence, our results show no widespread effect of EPI on audit quality, suggesting that the inconsistent results reported in prior studies may not be driven by the different formats explored or the short window investigated.

Assessing the Impact of Strategic Implementation of Circular Economy on the Competitive Advantage of Canadian Manufacturing Firms

This literature-based study assessed the influence of strategically implementing circular economy principles on the competitive advantage of manufacturing firms in Canada. Circular economy strategies, which are characterized by reduced resource input, waste, emission, and energy leakage, have risen in importance due to growing global sustainability concerns. Despite the known environmental and economic benefits of transitioning to a circular economy, a comprehensive understanding of its specific impact on competitive advantage has remained relatively unexplored, particularly within the context of the Canadian manufacturing sector. Through a systematic review and analysis of existing literature, this study illuminated the methods that firms adopted for this strategic transition. Such methods included the establishment of closed-loop supply chains, the integration of eco-design, and the shift towards product-as-a-service models. The study also identified and analyzed the challenges encountered during this process, including technical, financial, regulatory, and market barriers, and how firms strategically adapted to overcome these obstacles. The study finally examined the competitive outcomes of these circular economy strategies, assessing their impact on operational efficiency, cost savings, brand reputation, customer loyalty, and market differentiation. The research suggested that effectively implemented circular economy strategies could significantly enhance the sustainability and long-term resilience of Canadian manufacturing firms, while also contributing to competitive advantage. . Keywords: Circular Economy, Strategic Implementation, Competitive Advantage, Canadian Manufacturing Firms, Literature-Based Study

Information Systems Adoption and Performance: Evidence from Canadian Firms Linking Individual and Organizational Performance

ABSTRACT Implementing a new information system is bound to be a risky decision for any company. Studying the main factors that can help to improve the adoption success is crucial to help mitigate the risk of failure. This paper explores information systems adoption in a Canadian context and evaluates the main factors that drive performance using two models: 1) the task-technology fit (TTF) model and the technology acceptance model (TAM).

Tangible Rewards for More Than Just Productivity: Examining Canadian Public Accounting Firms' Rewards Programs*

ABSTRACTCompanies spend significant amounts of money on tangible rewards programs, even during the economic turmoil of the COVID‐19 pandemic. The prevalence, growth, and significance of these expenditures highlight the importance of understanding the purpose and use of these programs by organizations. Research on public accounting (PA) firms' compensation plans has focused on the balance between professional and commercial incentives in partner profit‐sharing schemes but has failed to examine the incentives for nonpartner audit professionals. However, it is exactly these professionals who do a substantial amount of work on audit engagements. This paper has three main purposes. First, we investigate the nature and composition of PA firms' tangible rewards programs and provide a detailed description. Second, we examine the use of firms' tangible rewards programs to provide evidence of what actions are being rewarded. We use Almer et al.'s (2005, Behavioral Research in Accounting 17: 1–22) framework, which presents dimensions of the auditors' professional contribution, and explores whether firms recognize these dimensions using tangible rewards. Third, we develop future research questions to help explore the use of tangible rewards in firms without structured output. We collect archival data on the use of tangible rewards from each of the Big 4 PA firms and three of the next four largest international accounting firms in Canada. We find that firms use their tangible rewards programs for “building a culture of recognition,” for performance incentives, and for employee and firm development, thus rewarding a broad set of measures beyond the incentive measures for hours worked.

The evolution of corporate payout in Canada

We document changes in the aggregate percentage and number of dividend-paying Canadian firms from 1989 to 2021 and observe a disappearing and partially reappearing dividend phenomenon similar to that in the United States. Unlike the US experience, in Canada, the number and percentage of dividend-paying firms are consistently higher than those of repurchasing firms throughout the sample period. Further, in Canada, the changes are driven by changes in the number of listed firms before and after the bursting of the internet bubble and the effects of the global financial crisis, which we call the new listing effect. The numbers are also affected by a tax change directed at income trusts and the change in the number of firms in the oil, gas, and mining sectors. In predicting a firm's dividend status based on firm-level characteristics, unlike recent US research, we find that the life-cycle theory, as measured by cumulative retained earnings and earnings volatility, plays an important role in explaining dividend status.

Board diversity and corporate innovation: New evidence from the Canadian context

Previous research on board diversity and firms’ innovation reported mixing results depending on the country studied. This paper is the first to investigate the association between three dimensions of board diversity: gender, education and tenure, and the innovation output of Canadian firms. We find that firms that have more than twenty-five percent of the board members as women are more innovative and corporate risk-taking is a mechanism for this effect. Board education diversity has a positive effect on innovation; however, we find no association between firms’ innovation and the experience diversity on the board or in the company.