Compustat Data Research Articles

Strategic positioning and asymmetric cost behavior

PurposeThis paper explores if the firm’s strategic orientation can be associated with differences in cost behavior activity.Design/methodology/approachUsing Compustat data from 1979 to 2012, the archival study examines if there are differences between differentiation and cost leadership strategies on the firm’s cost stickiness.FindingsThe main finding provides evidence that firms pursuing a differentiation strategy exhibit greater cost stickiness, on average, as compared to firms pursuing a cost leadership strategy. This relationship is moderated by the optimistic or pessimistic expectations of managers for future sales.Originality/valueThis paper contributes to the literature on cost management by explaining how strategic positioning affects firms’ cost behavior using the framework of asymmetric cost behavior. The study encompasses both product and period costs and documents the impact on earnings.

Measures of firm performance and concentration: Stylized facts and a dilemma of data reproduction

Economists and policymakers have used the increase in the concentration of return on invested capital (ROIC) in publicly traded US firms over the last decades as evidence for the decline of competitiveness in the broader economy. Principle support for this claim is a graph presented by the Council of Economic Advisors (CEA, 2016) that reproduces data from the McKinsey and Company’s book on Corporate Valuation. We demonstrate that the key findings associated with the evolution of the ROIC cannot be broadly reproduced using Compustat data and established accounting measures and calculations. Further, we find the recommended data filtering strategies can result in discarding more than 75% of the available data. We show that using the full information dataset can lead to significant changes in economic conclusions. We advocate for transparency in calculations and rationalization of data pre-processing.

Firm innovation under import competition from low‐wage countries

AbstractIn recent years, manufacturing firms in the United States have faced increasing import competition from low‐wage countries, especially China. Does this competition hurt or help firm innovation? This paper studies the effect of the surge in imports from China on innovation by US manufacturing firms. We first propose a theoretical framework that generates an inverted‐U‐shaped curve of innovation on imitation, which is based on the endogenous price elasticity of demand for the product in a Cournot model. We then take the theoretical prediction to data on publicly listed firms in the Compustat data set from 1990 to 2010. We find consistent evidence that Chinese import competition had an inverted‐U effect on firm innovation, as measured by patent counts and citation‐weighted patents. Our result suggests that when import penetration is less than 60% it positively affects firm innovation, but when it is more than 60%, this positive effect is inverted. This inverted‐U relation persists when we instrument import competition in the United States by using Chinese import penetration in the United Kingdom and when we test the robustness of the results by including sector‐specific trends. We find that the inverted‐U relationship is steeper for firms in high‐tech industries.

The Black Swan problem: The role of capital, liquidity and operating flexibility

How firms cope with tail risk is an under-researched problem in the literature on corporate risk management. This paper presents stylized facts on the nature of revenue shocks based on 65 years worth of Compustat data. We define a Black Swan as an unexpected year-on-year drop in revenue between 30%–90%. The rate of Black Swans has increased markedly since the 1970’s and there are more pronounced cyclical peaks in the three most recent decades. We also examine the role of three general determinants of firms’ ability to absorb Black Swans: equity capital, liquidity, and operating flexibility. The conclusion to emerge from this analysis is that the deciding factor in mediating the effects of revenue shocks on employment is liquidity. Cash reserves and cash margins make firms less fragile, but neither equity capital nor operating flexibility robustly buffer against Black Swans. The results continue to hold when we restrict the analysis to transient and cyclical revenue shocks, as well as when we use only a strictly exogenous revenue shock based on the airline industry.

Coping with H-1B Shortages: Firm Performance and Mitigation Strategies

The H-1B visa program allows companies to hire skilled foreign workers. Before 2014, the vast majority of these visas were allocated on a first-come-first-served basis. Since then, the program has been severely oversubscribed and all cap-subject visas have been allocated through lotteries. The authors merged Compustat data with administrative firm-level data on the universe of approved petitions for H-1B visas. Using difference-in-differences and matching estimators, this article finds that the switch in the visa allocation system negatively affected the growth of companies that used the H-1B program. Results indicate that these effects are quantitatively large and that their magnitudes grow over time.

The effectiveness and risks of expansive monetary policy under financialization

This paper incorporates low interest rates into a framework of post Keynesian theory of the firm under financialization and uses Compustat data to provide an empirical analysis of firm behavior in the eurozone for the period 2000–2018. It reasons that expansive monetary policy targeting low interest rates will only be effective in promoting investment in a scenario where shareholder value orientation (SVO) tightens the finance constraint on growth-maximizing managers. In contrast, when shareholder value maximization becomes the goal of the firm, expansive monetary policy may not only be ineffective in promoting growth but might actually be dangerous because it fosters financial fragility and promotes SVO. Data suggest that financialization in the eurozone represents a shift in the objectives of the firm toward maximizing free cash flows. However, there is no evidence that expansive monetary policy fostered leverage and an equity reduction in the eurozone. Still, the analysis shows that low interest rates were largely ineffective in fostering investment during the period 2008–2018. Therefore, monetary policy seems insufficient to promote investment and growth. Both expansionary fiscal policy and legal reforms that control shareholder power are needed.

Tax avoidance and earnings management: a neural network approach for the largest European economies

In this study, we investigate the relationship between tax avoidance and earnings management in the largest five European Union economies by using artificial neural network regressions. This methodology allows us to deal with nonlinearities detected in the data, which is the principal contribution to the previous literature. We analyzed Compustat data for Germany, the United Kingdom, France, Italy, and Spain for the 2006–2015 period, focusing on discretionary accruals. We considered three tax avoidance measures, two based on the effective tax rate (ETR) and one on book-tax differences (BTD). Our results indicate the presence of nonlinear patterns and a positive, statistically significant relationship between discretionary accruals and both ETR indicators implying that when companies resort to earnings management, a larger taxable income—and thus higher ETR and lesser tax avoidance– would ensue. Hence, as also highlighted by the fact that discretionary accruals do not appear to affect BTD, our evidence does not suggest that companies are exploiting tax manipulation to reduce their tax payments; thus, the gap between accounting and taxation seems largely unaffected by earnings management.

Lost in standardization: Effects of financial statement database discrepancies on inference

SEC-mandated, machine-readable structured filings are an alternative source to Compustat for companies' accounting data. Discrepancies between as-filed and Compustat data, potentially a result of Compustat's standardizations, are more pronounced for firms with complex financial reporting. We show that these data discrepancies affect inferences in four research settings: (i) properties of accrual accounting, including accruals-cash flow relationships and abnormal accruals; (ii) real earnings management; (iii) the existence and magnitude of six of 21 accounting-based anomalies examined, including the accruals anomaly; and (iv) disclosure quality assessments based on the hierarchical structure of financial statement items. FactSet data also exhibit significant and often larger discrepancies from as-filed data. Our findings demonstrate the importance of these data discrepancies for the interpretation of empirical tests.

The value of flexibility in multi‐business firms

AbstractResearch SummaryWhether diversified firms have advantages over their single‐business counterparts is the focus of much research in strategic management. Indeed, there is sparse evidence that corporate advantage exists, on average. We explore one potential driver of corporate advantage—that multi‐business firms have more flexibility than single‐business firms to cope with uncertainty, because they can internally redeploy resources across businesses. Using Compustat data, we show that uncertainty increases the relative advantage of multi‐business firms, a finding robust to controls for endogeneity. Consequently, the paper provides important insight and evidence around when corporate advantage might obtain. Moreover, we find that growth option value is accentuated in the presence of switching flexibility. Finally, multi‐business firms with redeployment experience and businesses with more inversely correlated returns benefit more from uncertainty.Managerial SummaryMulti‐business firms have a flexibility advantage over single‐business firms as they can reallocate firm resources from one business unit to another depending on inducements. What is the impact of this flexibility on firm value? In this paper, we test whether such a flexibility advantage translates into greater economic returns in more volatile markets. We expect that resource redeployment creates value if it amplifies business‐specific positive shocks while alleviating business‐specific downturns. Consistent with this argument, we find empirical evidence that with increasing stock market volatility, multi‐business firms benefit significantly more in terms of firm value than their single‐business counterparts. In particular, in highly volatile stock markets, monthly adjusted returns are 2.3 times higher for multi‐business firms than for single‐business firms.

Financial reporting uniformity: Its relation to comparability and its impact on financial statement users

AbstractWe explore the relation between financial reporting uniformity and comparability. We also examine the effect of uniformity on analyst coverage, analyst forecast accuracy and analyst forecast dispersion. We develop a Compustat‐based financial statement account uniformity measure based on the presentation of common financial statement line items. We define uniformity using a Jaccard similarity index where a firm's non‐missing Compustat data items are compared to a prototypical firm for that industry year. We emphasize the conceptual difference between uniformity and comparability, and our tests do not show a significant association between uniformity and output‐based accounting comparability. However, we find that the association between account uniformity and comparability becomes positive in high research and development firms, while it becomes negative in firms with higher managerial discretion. We explore the association between uniformity and information processing efficiencies, and we show that our uniformity measure is positively associated with analyst coverage. Furthermore, we partition our uniformity measure into separate income statement and balance sheet components. We find that income statement uniformity is associated with higher forecast accuracy and lower forecast dispersion, while balance sheet uniformity is associated with greater analyst coverage. Finally, we provide further support for these findings using an XBRL‐based uniformity measure.

Turbulent Business Cycles

Recessions are associated with sharp increases in turbulence that reshuffles firms' productivity rankings. To study the business cycle implications of turbulence shocks, we use Compustat data to construct a measure of turbulence based on the (inverse of) Spearman correlations of firms' productivity rankings between adjacent years. We document evidence that turbulence rises in recessions, reallocating labor and capital from high-to low-productivity firms and reducing aggregate TFP and the stock market value of firms. A real business cycle model with heterogeneous firms and financial frictions can generate the observed macroeconomic and reallocation effects of turbulence. In the model, increased turbulence makes high-productivity firms less likely to remain productive, reducing their expected equity values and tightening their borrowing constraints relative to low-productivity firms. Thus, labor and capital are reallocated to low-productivity firms, reducing aggregate TFP and generating a recession with synchronized declines in aggregate output, consumption, investment, and labor hours, in line with empirical evidence.

Dynamic Peer Groups of Arbitrage Characteristics

We propose an asset pricing factor model constructed with semiparametric characteristics-based mispricing and factor loading functions. We approximate the unknown functions by B-splines sieve where the number of B-splines coefficients is diverging. We estimate this model and test the existence of the mispricing function by a power enhanced hypothesis test. The enhanced test solves the low power problem caused by diverging B-splines coefficients, with the strengthened power approaching one asymptotically. We also investigate the structure of mispricing components through Hierarchical K-means Clusterings. We apply our methodology to CRSP (Center for Research in Security Prices) and Compustat data for the U.S. stock market with one-year rolling windows during 1967–2017. This empirical study shows the presence of mispricing functions in certain time blocks. We also find that distinct clusters of the same characteristics lead to similar arbitrage returns, forming a “peer group” of arbitrage characteristics.

Untangling innovation: an examination of compensation, corporate social responsibility, and corporate financial performance

PurposeThis study aims to examine how highly innovative firms behave differently from their peers to become profitable. The authors investigate this through two distinct groups, one group of firms that have appeared on the Forbes 100 most innovative firms for 5 out of the past 10 years and a carefully curated control group.Design/methodology/approachUsing a matched sample of 190 distinct firms, all with 10 years of historical data, the authors conduct a series of regressions and two mediated models. This method enables the examination of several possible differentiators for highly innovative firms, namely, CEO Pay, CEO Pay Ratio, Median Employee Pay and Corporate Social Responsibility (CSR).FindingsIn all, the authors conducted five separate hypothesis tests, all with statistical significance. Of note, the authors find innovative companies do pay employees more, engage in more CSR acts and are more profitable than peer companies. In a mediated regression model, the authors also find that the median employee pay fully mediates the relationship between firm innovation and corporate financial performance.Research limitations/implicationsThe study first shows that these highly innovative firms do not reach a position to rely merely on their innovation reputation to be profitable or attract eager employees. The authors find no relationship between years on the Forbes 100 list and profitability, median pay or total CSR in the data.Practical implicationsThis research uses commonly available data to explore how innovative firms behave. Rather than being single-mindedly focused on innovation, results indicate that innovative elite firms are more generous (in employee pay) and concerned about non-profit factors (CSR) than their peers. Innovative firms are then able to do all this and remain profitable. An additional implication of this research is that managers should prioritize CSR. CSR is not just a tool for less innovative companies to distinguish themselves or firms with low reputations to rehabilitate themselves.Social implicationsAs a society, we are living through unprecedented times concerning how we treat one another in the world. Often, the argument is made that firms should specialize, optimize and be strategically focused. However, highly innovative firms (often regarded as focused, specialized and optimized) in the sample show that paying people more and carrying out CSR is highly compatible with their success.Originality/valueTo the best of the researchers’ collective knowledge, this study is the only one of its kind to create and use such a robust data set, obtaining data from four different sources, namely, 10 years of Forbes top 100 innovative companies, SEC filing of the DEF 14 A for each company for two years, the Kinder, Lyndenberg and Domini database for 10 years and Compustat data for 10 years.

Turbulent Business Cycles

Recessions are associated with sharp increases in turbulence that reshuffle firms' productivity rankings. To study the business cycle implications of turbulence shocks, we use Compustat data to construct a measure of turbulence based on the (inverse of) Spearman correlations of firms' productivity rankings between adjacent years. We document evidence that turbulence rises in recessions, reallocating labor and capital from high- to low-productivity firms and reducing aggregate TFP and the stock market value of firms. A real business cycle model with heterogeneous firms and financial frictions can generate the observed macroeconomic and reallocation effects of turbulence. In the model, increased turbulence makes high-productivity firms less likely to remain productive, reducing their expected equity values and tightening their borrowing constraints relative to low-productivity firms. This leads to a reallocation that reduces aggregate TFP. Unlike uncertainty, turbulence changes both the conditional mean and the conditional variance of the firm productivity distribution, enabling a turbulence shock to generate a recession with synchronized declines in aggregate activities.

Monetary policy and credit flows

The paper assesses the impact of monetary policy shocks on credit reallocation and evaluates the importance of theoretical monetary policy transmission mechanisms. Compustat data covering 1974 through 2017 is used to compute quarterly measures of credit flows of borrowing firms. I find that expansionary monetary policy is associated with positive long-term credit creation and credit destruction (i.e. credit reallocation). This impact is larger for financially constrained firms and those that are perceived as relatively risky to the lender. This is predicted by the balance sheet channel of monetary policy and mechanisms that reduce lenders’ risk perceptions and increase the tendency to search for yield.

Striking a Balance During Economic Crisis: An Empirical Application of Strategic Balance Theory

This paper examines the generalizability of the strategic balance theory in the context of economic crisis by empirically investigating the relationship between strategic similarity and firm performance during economic recessions. Analyzing the WRDS Compustat data for the U.S. manufacturing firms from 1984 to 2019 by using a firm-specified fixed effect panel data model, we show that the strategic balance mechanism is strengthened in the context of economic crisis. We also find that the strategic balance mechanism is weakened for technological leaders. This study contributes to the current literature by investigating the boundary conditions of the strategic balance theory and revealing how the strategic balance mechanism changes in different contexts.

Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics

Abstract In this article, we ask how bankruptcy law affects the financial decisions of corporations and its implications for firm dynamics. According to current U.S. law, firms have two bankruptcy options: Chapter 7 liquidation and Chapter 11 reorganization. Using Compustat data, we first document capital structure and investment decisions of non-bankrupt, Chapter 11, and Chapter 7 firms. Using those data moments, we then estimate parameters of a general equilibrium firm dynamics model with endogenous entry and exit to include both bankruptcy options. Finally, we evaluate a bankruptcy policy change similar to one recommended by the American Bankruptcy Institute that amounts to a “fresh start” for bankrupt firms. We find that changes to the law can have sizable consequences for borrowing costs and capital structure which via selection affects productivity, as well as long run welfare.

The Black Swan Problem: The Role of Capital, Liquidity and Operating Flexibility

How firms cope with tail risk is an under researched problem in the literature on corporate risk management. This paper presents stylized facts on the nature of revenue shocks based on 65 years worth of Compustat data. We define a Black Swan as an unexpected year-on-year drop in revenue between 30-90%. The rate of Black Swans has increased markedly since the 1970s and there are more pronounced cyclical peaks in the three most recent decades. We also examine the role of three general determinants of firms’ ability to absorb Black Swans: equity capital, liquidity, and operating flexibility. The conclusion to emerge from this analysis is that the deciding factor in mediating the effects of revenue shocks on employment is liquidity. Cash reserves and cash margins make firms less fragile, but neither equity capital nor operating flexibility robustly buffer against Black Swans.

Estimating and Imputing Missing Tax Loss Carryforward Data to Reduce Measurement Error

The ability to reduce current and future taxable income with prior years' taxable losses is highly relevant for explaining firms' effective tax rates. Compustat data on the tax loss carryforward (TLCF) are, however, often missing. We propose a method to estimate values for the missing TLCF data instead of the common practice in the literature of imputing zero values. In order to assess the accuracy of our method, we compare our estimated TLCFs with both a random selection of 10-K data and Compustat data for firm-years where Compustat data is available. The results show that our estimated values align very closely with the reported data. We re-analyze two existing studies using these estimated values. With the first, we show that imputing our estimated values instead of zeros leads to a large decrease in measurement error. This reduces the risk that firms with missing data and low effective tax rates are incorrectly classified as tax aggressive. The second re-analysis shows that using our estimated TLCFs leads to economically and statistically different conclusions compared to imputing zeros. Using our estimated values thus increases the probability of correct inferences in studies that use Compustat TLCF data. The estimated values are available from https://doi.org/10.34894/N9J1WE.

In a Minsky Moment, can financial statement data predict stock market crashes and recessions?

AbstractThe Financial Instability Hypothesis posits that debt, and the validation of debt characterizes the state of the economy. A Minsky Moment is a swift collapse of asset prices after a long period of debt‐fueled growth. Current literature lacks empirical analysis to validate the Financial Instability Hypothesis with respect to stock market crashes and financial crises. Based on Vercelli’s (2009) interpretation, Minskys’ characterization of debt validation is based on two indices. This first index depicts the current liquidity of a firm. The second index depicts the expected solvency of a firm. Both the liquidity index and the solvency index can be calulated using financial statement data. Using Compustat data from 1982 to 2015 in a probit regression model, this paper supports how the role of debt and how the change in the validation of debt predict a stock market crash and an onset of a recession. This study contributes to the existing literature by being the first study to support the validity of the Financial Instability Hypothesis using financial statement data and by creating a model to predict future stock crashes and recessions.