Canadian Firms Research Articles

The determinants of new capitalizations of R&D expenses in Canada

Under certain conditions, Canadian and international accounting standards allow firms to present R&D costs in their balance sheets (capitalization). This article analyzes the determinants of new capitalizations of R&D costs by focusing on positive accounting theory and the influence of the CEO. Based on a sample of 440 observations of Canadian firms between the years 2000 and 2003, the results show that the size, debt load, presence of a CEO who holds an important but not majority block of shares, and CEO’s years of seniority all influence the decision to present new capitalizations of R&D costs. The presence on the board of an important stockholder other than the CEO attenuates the influence of the CEO.

Foreign market entry mode behavior as a gateway to further entries: The NAFTA experience

Trade liberalization policies have created a vibrant economy in Mexico by successfully increasing the flow of trade and foreign direct investments. This study investigates whether involvement in Mexico is considered attractive as a market in and of itself, or whether it is also attractive because Mexico can also serve as a gateway to other Latin American markets. We call this latter idea “The Gateway Proposition” and present it against the backdrop of NAFTA. The Gateway Proposition suggests that the ability of firms to expand their markets further into Latin American countries in the future could be an additional incentive to invest in Mexico. Accordingly, we analyze entry mode strategy for U.S. and Canadian firms in Mexico as well as their involvement level, equity participation, resource commitment, risk tolerance, and control. The findings of these analyses support The Gateway Proposition, suggesting that a firm's future involvement level is motivated not only by the Mexican market potential, but also by Mexico's ability to serve as a gateway to other Latin American markets. Evidence also suggests that large multinational firms with past experience in Mexico are inclined to respond to emerging Latin American market opportunities by becoming more involved in Mexico.

Executive pay and “independent” compensation consultants

Executive compensation consultants face potential conflicts of interest that can lead to higher recommended levels of CEO pay, including the desires to “cross-sell” services and to secure “repeat business.” We find evidence in both the US and Canada that CEO pay is higher in companies where the consultant provides other services, and that pay is higher in Canadian firms when the fees paid to consultants for other services are large relative to the fees for executive-compensation services. Contrary to expectations, we find that pay is higher in US firms where the consultant works for the board rather than for management.

Prebid Run‐Ups Ahead of Canadian Takeovers: How Big Is the Problem?

This paper studies the price‐volume dynamics ahead of takeover announcements for 399 Canadian firms from 1985 to 2002. I find evidence consistent with insiders trading illegally, creating both abnormal returns (ARs) and abnormal turnover (AT) ahead of the announcement. The rise in AT begins far ahead of the actual announcement, accompanied by ARs in the last five trading days, consistent with more informed trading. Data on disclosed insider trading indicate a sharp increase in volume prior to the takeover announcement, suggesting that insiders make use of private information. This study confirms the importance of AT for triggering an insider trading investigation.

Do Unions Affect Pay Methods of Canadian Firms? A Longitudinal Study

Drawing on two waves of survey data collected from 250 Canadian firms in 2000 and 2004, this study examines union influence on the mix of compensation methods used by employers. As expected, firms with more unionization devoted a larger proportion of total compensation to indirect pay (also known as “employee benefits”) than did firms with less unionization, a finding that held in both time periods. However, while more unionized firms devoted a smaller share of compensation to individual performance pay in 2000, this was not true in 2004. Also surprising, more unionized firms did not differ significantly from less unionized firms in their proportions of base pay, group performance pay, or organizational performance pay in either time period. The paper concludes that although unions may still have the power to influence some aspects of the wage bargain (i.e. the compensation mix), this power may be declining.

Adjusting for cultural differences, a new DEA model applied to a merged bank

The usefulness and application of Data Envelopment Analysis (DEA) efficiency measurements is usually limited by the requirement of consistent operating circumstances. However, in many real world situations this is not the case, so to overcome this problem, this paper reports on a new strategy by inventing a Culturally Adjusted DEA model to benchmark business units that operate under different cultural (business) environments. This is especially useful when these environmental factors are partial causes of inefficiency and can not be simply incorporated into a DEA model as inputs or outputs. A simulation analysis is conducted to examine the effectiveness of the CA-DEA model for controlling these environmental effects. This model is applied to a real life efficiency study of two major financial firms in Canada in 2000, when the two entities started to consolidate and merge their branch networks. Two cultural indices are identified to represent a firm’s unique operating environment, one to capture the nature of a firm’s corporate strategies (Corporate Index), and the other to estimate the effectiveness of a firm’s operational systems (Service Index). The results show that a firm’s corporate culture has a significant influence on its branches’ efficiency and this, we found, is often neglected in such studies. This paper also makes a contribution to the bank merger literature by providing an internal view of the potential benefits that may result from sharing cultural advantages while identifying the true managerial inefficiencies.

CEO Manipulation of Stock-Option Grants: Evidence from Canadian Public Firms

Using a sample of unscheduled stock options granted to CEOs of large Canadian firms, we find reliable evidence of option grants manipulation. Our results show that the introduction of the two-day filing requirement following the Sarbanes-Oxley Act (SOX) has eliminated backdating practice by Canadian firms cross-listed in the U.S. stock market. Further, we find that SOX has altered the way Canadian domestic firms manipulate stock option grants. Most importantly, we find that cross-listed firms are likely to set stock option grants in harmony with the day-of-the-week effect. Our study suggests that Canadian regulators should at least adopt the SEC-initiated change and should also introduce new regulations that enhance the monitoring role of board of directors.

Broad‐based incentive plans, HR practices and company performance

The purpose of this paper is to further develop our knowledge of the complementarities between broad‐based incentives and human resource (HR) management practices, and their combined impact on company performance. We focus on three HR practices that are expected, separately and in combination, to enhance the effectiveness of broad‐based plans: information sharing, upward communication, and training in team skills. Using a sample of 305 Canadian firms, we find that companies with broad‐based incentive plans have lower levels of upward communication and higher levels of information sharing compared with companies that do not offer incentives to the majority of their workforce. Further, we find that companies with broad‐based incentive plans are more productive compared with companies with no such plans, and the presence of supporting HR practices increases their productivity advantage even further. In particular, upward communication combined with broad‐based incentives has a strong positive relationship with productivity.

The relationship among board of director characteristics, corporate social performance and corporate financial performance

PurposeThe purpose of this paper is to investigate the link between qualitative measures of a firm's Board of Directors and its corporate social performance (CSP).Design/methodology/approachCSP is a function of qualitative measures of a firm's Board of Directors, as well as firm risk and financial performance. A longitudinal sample of 104 Canadian firms is used.FindingsBoard independence is positively related to social performance but shareholder orientation is not. In addition, a positive relationship between social performance with both financial performance and debt is found.Research limitations/implicationsAlthough the sample is small and restricted to Canadian firms, the results are quite robust. Future studies should consider using qualitative measures on a larger international sample of firms.Originality/valueThis paper uses qualitative measures – the degree of independence of the Board and the Board's level of shareholder orientation – to examine the interrelationship between a firm's Board of Directors and its CSP.

Growth History, Knowledge Intensity and Capital Structure in Small Firms

This paper explores the financial characteristics of successful Canadian small- and medium-sized enterprises (SMEs). It asks whether industry membership and early growth history play a role in shaping these financial characteristics. Industry comparisons are based on production activity and knowledge intensity. Growth distinctions are based on the firm’s employment and sales history. We evaluate our hypotheses with survey data from a stratified random sample of 2,775 Canadian firms. Proportional weighting techniques are utilized in all analyses. Our study reveals a strong correlation between capital structure and knowledge intensity. In contrast, growth histories are not obvious determinants of financial structure. Results also suggest that leverage strategies are more apparent in low-knowledge industries, in firms with higher expectations of future performance, and in businesses with more balanced financial structures.

APPROPRIATENESS OR EXPECTED RETURNS? ORGANIZATIONAL REPRESENTATIONS OF CORPORATE ENVIRONMENTALISM.

This paper explores how organizations build representations of their corporate environmentalism in their annual reports. From the content analysis of the reports of 7 Canadian firms in the resource industry over 20 years, I identify the emergence of three organizational stories describing the relationship of organizations with the natural environment.

Usefulness of comprehensive income reporting in Canada

In January 2005 the Canadian Accounting Standards Board (AcSB) issued three new accounting standards that require Canadian firms to mark-to-market certain financial assets and liabilities and recognize the holding gains and losses related to these items as other comprehensive income or as part of net income. The Board’s objectives for issuing the new standards are (i) to harmonize Canadian GAAP with US and International GAAP, (ii) to enhance the transparency and usefulness of financial statements, and (iii) to keep pace with changes in accounting standards in other countries that are moving towards fair value accounting. This paper investigates empirically whether requiring Canadian companies to report comprehensive income and its components provides the securities market with incremental value-relevant information over the traditional historical-cost earnings approach. Previous empirical studies provide mixed evidence on the value relevance of other comprehensive income and its components. This mixed evidence may be attributed partially to the use of as if methodology to construct an ex-ante measure of other comprehensive income prior to the implementation of SFAS 130, which introduces measurement error. In contrast, this study uses actual data on other comprehensive income for a sample of Canadian firms cross-listed in the US in the period 1998–2003. We find evidence that available-for-sale and cash flow hedges components are significantly associated with price and market returns. We also find that aggregate comprehensive income is more strongly associated (in terms of explanatory power) with both stock price and returns compared to net income. However, we find that net income is a better predictor of future net income relative to comprehensive income. Our findings suggest that mandating all Canadian firms to adopt the new accounting standards is expected to enhance the usefulness of financial statements. Our findings, therefore, should be of interest to Canadian accounting policy makers as they provide ex-ante evidence on the potential usefulness of mandating firms to report comprehensive income and the components of other comprehensive income in their financial statements.

Why do firms denominate bank loans in foreign currencies? Empirical evidence from Canada and U.K.

We examine the determinants of the decision to raise bank loans in foreign currency, based on two samples of syndicated loans raised by U.K. and Canadian firms. By using the percentage of sales in the U.S. market for a firm, we proxy the exposure of the firm’s cash flows to the U.S. dollar. We find strong evidence that firms which have substantial foreign sales are the ones that have a higher probability of borrowing in that foreign currency. In particular, we show that firms that have a significant portion of their sales in the U.S., will tend to hedge their exposure by borrowing in U.S. dollars. This result is consistent with the notion that foreign currency loans serve as a natural hedging instrument. Our results are also economically significant; they imply that a one standard deviation increase in the ratio of foreign sales in the U.S. increases the probability of borrowing in U.S. dollars by 23%. For the first time in the literature, we show that currency choice should be considered an integral feature of the loan contract, given interdependencies that exist between currency choice and other loan contract terms such as maturity and secured status. Our results show that maturity and secured status both affect the currency choice of the loan, however the manner in which they impact the currency choice varies between countries and is dependent on borrower characteristics.

An Empirical Analysis of the Firm's Reorganization Decision

Résumé Le cadre théorique proposé par Bulow & Shoven et ensuite par White constitue le fondement de l’analyse du choix des entreprises insolvables entre la liquidation et la réorganisation financière. Or, ce cadre théorique n’a jamais fait l’objet d’études empiriques. Cet article propose de tester empiriquement le choix des entreprises entre la liquidation et la réorganisation sur la base de micro données de 640 entreprises canadiennes insolvables. Les résultats tendent à confirmer les prédictions du modèle, c’est à dire que la probabilitié qu’une entreprise opte pour la réorganisation augmente avec le montant des actifs non garantis, la pourcentage de réduction de la dette non garantie et la taille de l’entreprise alors qu’elle diminue avec la valeur de liquidation des actifs. Les résultats montrent également que le cadre proposé par Bulow-Shoven-White est incomplet. En effet, le choix de la réorganisation financière dépend également de la proportion des créances gouvernementales, du statut juridique de l’entreprise et du ratio actif/passif.

Foreign Affiliate Trade Statistics - Canadian Operations Abroad, 1999 to 2001

Canadian goods and services can be sold in the international market either through crossborder exports or through foreign affiliates. Cross-border exports involve Canadian companies producing the goods and services in Canada and exporting them to the foreign markets. Sales through foreign affiliates involve establishing a commercial presence in the foreign market from which to conduct business transactions. Foreign Affiliate Trade Statistics (FATS) measure both the operations of (i) foreign-owned affiliates in Canada and (ii) affiliates of Canadian firms located abroad. This report covers the activities of foreign affiliates of Canadian multinationals abroad or outward FATS. It is a follow-up to a previous report titled Foreign Affiliate Trade Statistics- 1999, How Goods and Services are Delivered in International Markets. Continuing globalization of the world economy, and an increasing occurrence of trade agreements have created a need for this type of information. With this second release of FATS data, the data for 2000 and 2001 are being added to the 1999 data released last year. Comparing FATS data with cross-border exports further examines the relationship between exports and foreign direct investment. Other characteristics such as industrial activity, location, goods/services composition and affiliate size are presented as part of the overall descriptive analysis.

The Effect of Organizational Innovation and Information Technology on Firm Performance

This paper examines the issue of whether investment in information and communication technologies (ICT), combined with organizational changes and worker skills contribute to better performance in Canadian firms. We find that Canadian firms have actively engaged in organizational changes in the areas of production and efficiency practices, human resource management (HRM) practices, and product/service quality-related practices. These ractices along with ICT use are found to be related to better firm performance. We find that while ICT is productive on its own, it is more productive in firms that combine high levels of ICT with high levels of organizational change. The firms that combine ICT with organizational changes have a high incidence of productivity improvement as well as high rates of innovation. These findings suggest that to be successful, firms typically need to adopt ICT as part of a “system” or “cluster” of mutually-reinforcing organizational approaches. We also find that ICT and human capital are complements in the services sector. The firms that combine high levels of ICT and high levels of worker skills have better firm performance.

Sell‐offs, internal capital markets, and long run performance: Canadian evidence

PurposeThe paper's aim is to analyze excess returns generated by Canadian sell‐offs and their links to changes in firms' internal capital allocation efficiency to test the efficiency of internal capital markets after assets divestitures.Design/methodology/approachThis study investigates the relationship between the level of the excess returns subsequent to sell‐offs and changes in the capital allocated through internal capital markets. The authors measure excess returns by calculating buy‐and‐hold abnormal (BHAR) returns up to three years after divestitures and test whether changes in value are related to changes in investment efficiency. The paper uses the relative value added by allocation (RVA) as developed by Rajan et al. to measure the variation in allocational efficiency of the internal capital market.FindingsThe study reveals that on average assets divestitures enable Canadian firms to keep up with the performance of their peers of the same industrial sector during the long‐run post divestiture period. A closer look at the results shows that the variation of long‐run post divestitures performance among Canadian firms is significantly and positively linked to changes in the allocational efficiency of the internal capital markets. These results suggest that dismantling some parts of the internal capital market does lead to improvements in firm value in the long run.Research limitations/implicationsThe sample is limited to a group of firms that sell off a portion of their assets. Further research could be conducted to determine whether other divestiture methods (spin‐off, sell‐off or equity carve‐out) have any impact on internal capital allocation efficiency and long run financial performance.Originality/ValueThe paper adds to other studies examining the source of gains from divestitures by documenting the effects of changes in internal capital allocation efficiency on the creation of long‐term shareholder wealth.

CEO Compensation and Bank Risk: Empirical Evidence from the Canadian Banking System

Recent studies on CEO compensation, both theoretically and empirically have shown the inability to link the CEO pay with the firm’s performance. From the empirical work of Brewer III, Hunter and Jackson III (2004), the authors relate CEO compensation to the risk-taking factor of the U.S. banks. As such, recent studies on the Canadian executive compensation have shown that the rise in the top executives’ pay is not entirely related to the firm’s performance. Studies focusing on Canadian firms are available but only few studies are available on the Canadian banking firms. Focusing on the Big Six banks in Canada, this paper will evaluate the CEO compensation and its relationship with the bank risk-taking factor. Furthermore, this paper will find out if the moral hazard issue affecting the U.S. banks is relevant to the Canadian banks as well.

Fits in strategic human resource management and methodological challenge: empirical evidence of influence of empowerment and compensation practices on human resource performance in Canadian firms

This study attempts to answer three questions: 1) How does the methodological approach used to measure fit among practices influence the results obtained? 2) To what extent do bundles of empowerment and compensation practices individually influence human resource outcomes? and 3) Does the fit between these bundles of practices increase the prediction of the level of discretionary effort, turnover and productivity? Following a two-wave survey strategy, statistical analyses performed on 128 Canadian companies suggest that the statistical methods used to measure fit are not interchangeable. The findings reveal that the use of an extensive relational empowerment strategy is significantly and negatively related to voluntary turnover when accompanied by a compensation program that rewards performance. In contrast, a compensation strategy that supports good working conditions or the use of financial incentives seems sufficient to influence human resources performance. Nonetheless, the results militate in favour of adopting a configurational approach with empirical deviation profile to fit to better understand the complexity of the equifinality effect of HR strategies. Lastly, the polynomial regression results question the linearity assumption of the relationship between empowerment, working conditions and productivity.

La multinationalisation des pétrolières canadiennes

Canadian foreign direct investment in the oil and gaz industry has been growing at a very rapid pace during the seventies and early eighties. Traditionnally oriented towards the United States, it is now flowring towards the United Kingdom and other North Sea Countries, the Mediterranean, Indonesia and Australia. Increasing oil prices and profits, mainly in international operations, explain the growth of many Canadian independent. These international firms are not already truly multinationals: they produce oil and/or gaz in two to four countries, but the extent of their exploration and development activities is leading them towards a more global activity. The article is organized into three sections. In the first section the patterns of ownership and control in the Canadian industry is shown, including the emergence of local companies and the "Canadianization" process of the seventies; in the second one, the multinational expansion of Canadian firms is analyzed using agregate data; in the final section the main results are summarized and some forecasts are made on the future evolution of Canada emerging oil multinationals.