Capital Firms Research Articles

Coaches or Speculators? The Role and Impact of Venture Capital on Executive Compensation in Chinese Listed Companies

ABSTRACTIn this paper, we utilize a panel dataset that covers 1245 listed companies which accomplished their IPO during 2006 to 2014 in China to investigate the impact of venture capital (VC) firms on executive compensation, equity incentive and pay-performance-sensitivity. We make several key findings: First, we find the presence of VCs can significantly raise the executive compensation. Second, high reputation VCs and private VCs increases the likelihood of granting executive equity incentives, whereas foreign VCs are significantly negatively related with executive equity incentive. Third, the pay-performance sensitivity of government VCs and foreign VCs is significant on stock return (RET) whereas insignificant on accounting performance (ROA). Moreover, the increasing VCs share in portfolio companies enhance the pay performance sensitivity on RET. Our results show that before VCs final exiting their post-IPO portfolio companies in China, VCs’ impact on executive compensation are more consistent with grandstanding theories and intending to provide higher cash compensation to encourage executives to raise the companies’ stock price, which is indicating VCs’ changing role from a coach into a speculator after the portfolio companies’ IPO.

Impact of Knowledge Capital on the Production of Hungarian Firms

Several studies identified a positive relationship between a firm’s knowledge assets and its productivity. Knowledge assets are usually considered as the level of human and technological capital of the firm. Knowledge assets of the firm may also increase by the so-called spillover effect, especially in less developed host economies of foreign direct investment, which means diffusion of the technology, knowledge and managerial skills from foreign companies to local ones. Beyond the impact of the human and technological capital of firms, this paper also examines the effect of spillover of knowledge on the firms’ performance in Hungary within a linear regression model. The model is based on individual data of Hungarian enterprises, examining the change in performance as the difference of the variables between 1996 and 2014. The paper shows that knowledge assets (concerning human capital) basically determine the firms’ production in Hungary from 2000. The effect of research and development activity was not significant in the investigated period. Foreign shares in the industries’ total equity (proxy for spillover effect) have a weak and, after 2005, a negative influence on performance. The spillover effect in the Hungarian economy was not demonstrated by the regression model.

Book to market ratio and expected stock return: An empirical study on the Colombo stock market

The book to market capitalization of firms become one of the common risk factor on asset pricing models. The impact of book to market equity of firms on stock returns was initially found in US market and subsequently tested in many international markets both in developed and developing markets. However, the empirical test of value effect in Sri Lankan stock market seems hard to find in literature. Therefore, this study examines existence of value effect on stocks returns in the Colombo stock market as an emerging capital market. The analysis show a weak positive cross sectional relationship between stock return and Book to Market ratio of stock and existence of value effect.

How does family capital influence the resilience of family firms?

How does being a family business contribute to resilience in a turbulent business environment? We draw on the Sustainable Family Business Theory (SFBT) to highlight the role of family capital (human, social, and financial capital) in the resilience of a sample of family firms. We collected data through semi-structured interviews with managers of four Tunisian family firms after the political revolution between 2011 and 2014, which triggered economic instability and business discontinuities. Organizational agility and resilience consequently became vital. We find that social capital of family firms, which may be composed of local and/or international contacts, contributes the most to firms’ ability to absorb shocks, reallocate existing resources, and internalize practices that allow firms to cope with future disturbances. We also find that financial capital is largely determined by social capital and human capital of family firms. Our research contributes to the family business resilience literature by showing how developing resilience at an individual level (social capital) fosters organizational level (family business) resilience. The interactions between the three dimensions of social capital are particularly interesting for sustainable family business theorists. We show that financial capital mediates the impact of human and social capital in order to strengthen firms’ resilience. Our research also has implications for the international entrepreneurship literature: we found that international contacts provide family businesses in crisis with strong social support together with access to strategic opportunities at the local level. Future research could focus on the direct and indirect impacts of several dimensions of family capital in order to test which configuration of family capital leads to the greatest resilience. Studies could also further explore the impact of the network of international contacts in the strategic renewal of resilient family firms by identifying international opportunities.

Corporate CAPEX and market capitalization of firms on Malawi stock exchange: an empirical study

PurposeMarket capitalization of firms reflects the current value of a firm and provides a reasonable basis on mergers and acquisition bargains. Determinants of a firm’s increasing or decreasing market capitalization are multi-faceted, hence the study. The paper is about a historical study of the responsiveness of common share prices of some listed industrial companies to the firms’ investments in capital expenditure. This study aims to discuss the impact of capital expenditure on a firm’s market capitalization, with a focus on companies listed on the Malawi stock exchange (MSE).Design/methodology/approachThe study reviews data collected from published annual reports for the years from 2007 to 2015. The variations in capital expenditure (CAPEX) which are termed “increase” or “decrease” were studied to establish their association with variations in stock prices before the increase or decrease, and after the increase or decrease. As stock price changes are caused by other determinants, the variables of return on capital employed (ROCE), net profit margin (NPM), asset turnover (ATO) and earnings retention ratio (ERT) were analyzed, and a respective correlation test was done against CAPEX movement over the years through panel data analysis and regression analysis to establish the correlation between the variables using XLSTAT.FindingsAt 95 per cent confidence level, CAPEX correlates with ROCE and NPM at 0.373 and 0.249 coefficients, respectively, and negatively with ERT at 6.45e-2. With tests favoring a positive relationship between elements of profitability and stock price, the study finds that there is a positive relationship between a firm’s CAPEXs and its future stock prices.Research limitations/implicationsThe firm’s commitment to CAPEX has a positive impact on its stock price on the stock exchange. These findings, however, need to be interpreted with caution as the data reviewed excluded that from financial institutions, the inclusion of which may affect the outcome, and that the data are derived from a small and young stock market which may be lacking in its efficiency compared to the old and big ones the world over.Originality/valueThe study was undertaken based on the study of listed companies on the Malawi Stock Exchange, and the results may or may not reflect the reality on the ground in other stock exchanges.

Social capital in service-oriented firms: future directions

This collection aimed to provide a broader picture of the implications of social capital in service-oriented firms. In this piece, we identify trends for future research on social capital with a focus on the services industry, an important sector of the economy. We focus on three future directions: the internationalization of service firms, social capital for service-oriented social enterprises and public policy programmes to create social capital, particularly in the context of Asia Pacific. We then identify how the contributions to this collection are related to these future directions to encourage more confirmatory work in this dynamic field of research and practice on social capital in service-oriented firms in the Asia Pacific region.

Keynes's Application of Virtue Ethics in the General Theory in Chapter 9

Keynes carefully and methodically devoted chapter nine of the General Theory to a detailed discussion of Virtue Ethics which is related to Adam Smith’s discussion in The Theory of Moral Sentiments. Both Virtues and Vices were considered by Keynes. The four main virtues in the Greek version of virtue ethics, as enunciated by Plato(Socrates) and Aristotle, were Prudence, Temperance, Justice and Courage or Fortitude. Temperance and Courage can be combined, as done by Adam Smith in The Theory of Moral Sentiments into the virtue of self command. Adam Smith’s and Keynes’s explicit use of an Aristotelian, Virtue ethics approach contrasts with the economic profession’s explicit reliance on utilitarian ethics only. It is not possible to create a synthesis between the two different approaches to ethics. Keynes and Smith agree with Aristotle that the primary, major problem at the macro level for an economy is the existence of a major sub group of upper income class individuals that Smith appropriately identified as projectors, imprudent risk takers and prodigals. These individuals violate the primary virtue of prudence by activities that can cause negative effects that impact the entire society. Smith proposes that this behavior be neutralized or mitigated by imposing restrictions on their ability to obtain bank credit and loans. Smith also believed that at the macro level the number of sober people (frugal, parsimonious, circumspect, careful) will significantly outnumber the projectors, imprudent risk takers and prodigals, so that their impact on the macro economy would be limited. This, of course, is similar to Keynes’s point that “Speculators may do no harm as bubbles on a steady stream of enterprise.” However, this all changes if enterprise and speculation switch places, so that “…the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” This is precisely the problem that has arisen in the American and world economies since the late 1970’s. Thus, speculation can be regarded as a vice and enterprise can be regarded as virtue. The point can be made even more directly. A world dominated by George Romney type investors leads to growth and prosperity, while a world dominated by Mitt Romney types, Bain Capital private equity firms, hedge funds, financial speculators and stock market manipulators leads to economic downturn and stagnation.

Information and Cost of Equity Capital in Brazil: Does Competition Matter?

The objective of this paper was to analyze the effect of competition over better information on the cost of equity capital of Brazilian firms that trade their shares at the BMF Easley & O’Hara, 2004; Hughes, Liu & Liu, 2007). The sample comprised observations from 2008 to 2014. To reach the set objective, the following proxies were used for competition over better information: investment analyst coverage, the number of institutional investors with resources applied in the firm, the total number of individual private investors (shareholders) and the probability of private information; nevertheless, only the analyst coverage provided statistically significant results. By using the ordinary least squares estimations with fixed effects, Fama-MacBeth and quantile regression (scaled and not scaled), the main results indicated, on average, that the competition over better information is capable of reducing the cost of equity capital, and that this effect is most evident in firms which are in a previously-bad information environment (latest quantiles of the quantile regression, q.90 and q.95); in addition, the effect is only significant when the firm has a low analyst coverage. This paper’s major contribution to the literature was that it demonstrated that attracting analysts to cover company activity is important, to a certain extent, so firms can manage to reduce their cost of capital; analyst coverage dominated all the other variables usually present in the literature on competition over information.

Management of working capital - the Achilles heel of small and medium enterprises: the case of Greece

The main purpose of this paper is an empirical investigation of the relationship between working capital management and firms' performance in Small and Medium Enterprises (SMEs) in Greece during the crisis period. We used a data set of 459 SMEs split-up over eight sectors of economic activities according to the European NACE classification scheme. The research covers the period of 2008-2012, which gives the five-year period of observation of financial results of selected companies. The efficiency of working capital management was measured by accounts receivables turnover, inventories turnover, accounts payables turnover and cash conversion cycle. Return on assets was used as the profitability variable. The study is based on correlation and regression analysis to analyse data. The results indicate that all working capital components significantly affect Greek SMEs profitability. The paper is organised as follows: in the next section we briefly present the problem based on literature review. This is followed by the presentation of research methodology and the data sources used in the analysis. The results are presented and discussed in Section 3. Last section summarises the conclusions and presents further opportunities for research.

Working Capital Efficiency and Firm Value: Evidence form Pakistani Firms

Purpose: We examined the association between the efficiency of working capital and firm value for a sample of 49 firms registered on Karachi Stock Exchange for a period of 2004-2016. Additionally, the effect of financing constraints on this association is also examined. Design: Linear and Fixed Effect regression analysis is used to capture the effect of working capital management on firm value. We follow the model which was developed by the Fama and French and use by Pinkowitz et al. and Wasiuzzaman. Findings: We find that working capital efficiency is important for the firms as it affects the firm value and it improves firm efficiency by reducing the investment in working capital. Further, better management of working capital and firm value association is true for financially constrained firms. While, in case of unconstrained firms it the relationship insignificant. Originality: To the best authors’ knowledge, this is very first study on working capital and firm value in context of Pakistan. Hence this work adds valuable contribution in the scarce literature on working capital management and firm valuation relationship.

Policies to support environmental risk management in investment decisions

Investors are increasingly requiring assessments of environmental risks arising from climate change, natural resource scarcity and pollution. Improved environmental risk management also lowers the total cost of capital of firms, thus making them more attractive to investors. We illustrate this relationship by demonstrating how greater environmental risk may increase a firm's after-tax cost of capital. However, better environmental risk management by firms requires a range of complementary policies. The rules governing the financial system should support investment decision-making that takes into account environmental sources of risk and opportunity. Central banks can advance this objective by establishing environmental risk management and reporting requirements and adjusting capital provisioning to account for underpriced environmental threats. There is also a need to develop international guidelines and common policy and legal frameworks to support and streamline such initiatives. Developing such a policy strategy is likely to produce a self-reinforcing gain to firms, investors and society.

The effect of intellectual capital on the relationship between the governance structures of directors board of listed companies in Tehran Stock Exchange

Intellectual capital of firms is the combination of human, structural, and physical capital. Therefore, having control over these assets enable the organisation to have effective internal governance and also a successful foreign relation with customers, suppliers and others. This study has investigated the effect of intellectual capital on the relationship between structural governing of board governance and perceived firm's financial performance in Tehran stock exchange in the years 2009–2011. The present study is applied research. Eviews 7 software is used for calculation and analysis of collected data. The results showed that governing structure of the board governance has a positive significant relationship on intellectual capital. Also, intellectual capital has a positive significance on the relationship between governing structures of board governance and perceived firm's performance in Tehran stock exchange. So, with an emphasis on size, combination, and rate of board independence can significantly increase intellectual capital ratio and consequently the firm's performance.

CEO’s Emotional Commitment Level and its Firm Capital Structure Choice: Decision Tree Analysis

This research examines the determinants of firms’ capital structure introducing a behavioral perspective that has received little attention in corporate finance literature. After discussing the theoretical linking between firm capital structure choice and the CEO’s attitude and behavior, we are showing on empirical grounds the relationship between the manager’s behavior toward the capital structure preferences and his cognitive commitment level. The article explains that the main cause of capital structure choice is CEO commitment level. We introduce an approach based on Decision Tree Analysis technique with a series of semi-directive interviews. The originality of this research is guaranteed since it traits the behavioral corporate policy choice in emergent markets. In the best of knowledge this is the first study in the Tunisian context that explores such area of research. Results show that psychological dimension introduced in the capital structure analysis has enriched the Pecking Order Theory (POT) and the Static Trade Off Theory (STT) CEO (CEO affective commitment) prefer to finance their projects primarily through internal capital, by debt in the second hand and finally by equity.

Innovative Corporate Initiatives to Reduce Climate Risk: Lessons from East Asia

Businesses, investors, and insurers are requiring better quantitative assessments of their exposure to climate risks and their impact on climate change. They are incorporating these assessments in their day-to-day management and long-term investment decisions. Already, there are efforts to develop international guidelines, common policies and legal frameworks for such assessments, as well as the desire to foster climate financing. We examine recent progress in East Asia and the rest of the world in setting targets, pricing policies, and other mechanisms to reduce climate risks. We develop a model that demonstrates how reduced climate risk management may lower the total cost of capital of firms, thus making them more attractive to investors. We discuss the additional policies needed to support improved climate risk management in investment decisions, private investments in climate science, technology and innovation (STI) expansion, and more widespread adoption of climate financing and principles. Central banks, financial authorities, and governments can advance this objective by creating financial incentives to support investment decision-making. This would take into account factors such as improving climate performance, establishing better climate risk management and reporting requirements to foster green STI, and developing international guidelines and common policy and legal frameworks to support better climate risk management, assessments and reporting.

Firm Age, Corporate Governance, and Capital Structure Choices

Do the effects of corporate governance on corporate capital structure choices change as a public firm ages? First, we address the direct effects of firm age and governance features on both its decisions to use debt and how much debt to employ. Our analysis reveals a number of novel results. While firm age is positively correlated with the use of debt, it is negatively correlated with how much debt a firm uses. We also find that the effects of firm age on how much debt a firm uses is primarily due to the interaction between firm age and its governance features. The more power that insiders possess, the less debt that the firm uses as it ages. We interpret our evidence as implying that over time, managers allow their risk preferences to dominate their firm capital structure decisions when they are protected from discipline.

Venture Capital Financing as a Mechanism for Impelling Innovation Activity

Introduction The ability of national economies to create, implement, and successfully domesticate cutting-edge scientific-technological solutions, make effective and intensive use of human (including intellectual) capital, and come up with funding commensurate with need is what determines, in large part, their competitive potential and strategic positions in external and internal markets (Nonaka and Takeuchi, 1995; Quinn 1992; Birkinshaw, Hamel and Mol, 2008; Dzhukha et al., 2017; Cipovova and Dlaskova, 2016). This issue is topical not only for more economically developed countries whose economies may already now be regarded as post-industrial but also for countries with transitive economies, i.e. those transiting from industrialization to post-industrialization. What is crucial to the intensive and science-driven development of the global economy is that innovation systems formed at national levels must be in a fit state. The rationale behind this tenet is that the shift from a stochastic to an institutionalized innovation environment requires significant funding (above all, from sources other than the state's operating budget) if the nation is to implement a series of major investment-infrastructural projects. Yet, at the same time it is worth understanding that business entities operating presently within the real sector of the economy are substantially limited in the ability to self-finance their innovation activity, which is quite capital intensive. That being said, the use of traditional tools utilized in commercial banking and the financial market (loans, debt instruments, etc.) does not bring in much funding for them to invest in long-term projects (Pfirrmann, Wupperfeld and Lerner, 2012; Kormishkin et al., 2016; Vovchenko et al., 2017; Theriou, 2015; Thalassinos et al., 2015; Thalassinos and Kiriazidis, 2003; Thalassinos, 2008). This is due to the fact that under present conditions of financial-economic instability credit risk, as well as the risk of a business failing to meet other financial obligations, is quite high. This aspect is compounded by the fact that the innovation activity of business entities operating within the real sector of the economy is not only capital intensive but quite risky as well. A special role here is played by venture capital financing, a special form of syndicated (collective) investing in innovations that presupposes setting up special venture capital funds that act as an intermediary between venture capital investors and the senior management of the business entity engaged in innovation activity. Since the venture capital fund is an intermediary that institutionalizes venture capital financing, economic gains from innovation projects (investment venture capital profit) go to the business entity (termed a 'venture capital firm') and also to the venture capital investor. The venture capital investor may be a private (natural) person or a large financial, industrial, commercial-and-intermediary, insurance, or service corporation (i.e., legal persons). Furthermore, quite often venture capital firms are set up in the form of joint stock companies (corporate establishments). The venture capital fund, representing the interests of its investors, gets an ownership share in the capital of venture capital firms, and in some cases this share may account for up to 50-75% of the cost of the venture capital firm, but in practice the venture capital fund normally receives a blocking stake in the venture capital firm (25% + 1 share). Consequently, by reducing its participation share in the capital of the venture capital firm the venture capital fund does not take on any obligations respecting the management of the business, which makes it possible to keep risk levels down (Dudin, Lyasnikov, Kuznetsov and Fedorova, 2013; Vanacker, Heughebaert and Manigart, 2014; Novokreshchenova et al., 2016; Fetai, 2015; Boldeanu and Tache, 2016; Akopova and Przhedetskaya, 2016). Of no less importance is the motivation component of venture capital business, consisting in the following: in the event the founder (founders) of a venture capital firm does (do) not hold a majority stake in the investment, they may engage in corporate opportunism, reducing the level of their interest in the outcomes of the firm's activity, or pursue additional gains on the side--via, say, disclosing confidential information to the firm's competitors or other potential investors (Bigus, 2006). …

What do venture capital and private equity firms do? Some current and historical examples

ABSTRACTThe venture capital and private equity investment fields are not as well understood as other sectors of the financial industry, especially those focused on publicly traded instruments, such as stocks and bonds. To help business librarians understand venture capital and private equity firms, this article looks at how these businesses invest. By briefly examining investments by three venture capitalists and three private equity firms, readers can begin to understand the methods and aims of those investors. This article describes investments by venture capital leaders Georges Doriot of American Research and Development, William J. Casey, and Tom Perkins of Kleiner Perkins. It also describes some of the criteria applied by those venture capitalists to select firms in which to invest: how they evaluated companies and the executives who ran them. The article also looks at three private equity firms, Warburg Pincus, Tribeca Asset Management, and the Carlyle Group, companies those PE firms purchased, and factors that made those acquisitions profitable.

CSR and cost of capital: evidence from Japan

PurposeThis study aims to examine the link between corporate social performance (CSP) and the cost of capital of Japanese firms in 2008-2013, considering the influences of banking relationships and ownership structure.Design/methodology/approachIt examines the relation between CSP and the cost of capital in terms of the cost of debt, cost of equity and weighted average cost of capital, using a composite CSP measure based on stakeholder relationships. A regression model is adopted, controlling for bank dependency, ownership structure and firm-specific attributes.FindingsInstitutional ownership influences the CSP–cost of equity relation and reduces the cost of equity, while CSP is perceived by debtors as not information-mitigating for the observed period. For 2008-2010, the relation between CSP and bank dependency increases the cost of debt; however, the positive influence of bank dependency on the cost of debt dilutes during 2010-2013 as the shift to a more market-oriented financial market in Japan occurs.Practical implicationsAlthough bank borrowing is important, especially for small firms, non-financial disclosure makes external financing more flexible. Institutional investors concerned about the non-financial aspects of business, therefore, play an important role in mitigating the information asymmetry that exists in the capital market.Originality/valueThis study extends research on the CSP–cost of capital link by considering structural changes in financial systems (e.g. capital market perception of CSP and banks as delegated monitors).

Political risk and the cost of capital in the MENA region

We examine the impact of political risk in the MENA region on the cost at which firms can raise capital. Using the implied cost of equity as a measure of the cost of capital and ICRG's political risk rating as a proxy for political risk, we find that political risk results in a higher cost of capital. Economically, our results suggest that a one standard deviation increase in the political risk index is associated with a 450 basis points increase in the cost of equity capital of MENA firms. Our results are consistent across a battery of robustness checks. Our findings have important policy implications that are relevant to the MENA region and beyond.

What Makes Firms Innovative? The Role of Social Capital in Corporate Innovation

This paper offers a social capital explanation for the purported relationship between human capital investment and an organization’s innovation capability. We argue that social capital plays a mediating role in the relationship between the level of individual knowledge of employees and organizations’ innovation capabilities. The mediating mechanism is attributed to the role of social capital in knowledge exchange and combination that help enhance knowledge creation. Using survey data of 319 manufacturing firms in Korea, we conducted structural equation modeling (SEM) analysis to verify the mediating role of social capital in firms’ innovation performance. The results demonstrated that relational and cognitive dimensions of social capital are important mediators in realizing organizational innovation performance.