Conventional Firms Research Articles

Do sunk costs nip worker-owned firms in the bud?

In this article the author analyzes the interaction effect of the sunk cost of physical capital and of human capital on the entry of worker-owned firms (WOFs) and conventional firms (CFs). The author estimates a logit model and uses a comprehensive dataset of new French firms in manufacturing sectors with proxies of sunk costs defined at the sector level. The results show that the likelihood of WOF entry is the highest when the sunk cost of human capital is dominant while the sunk cost of physical capital is negligible, as predicted by Kazuhiko Mikami and Satoru Tanaka in their 2010 article. The interaction effect between the types of sunk costs is stronger for worker buyouts than for newly created WOFs. These results are robust to different estimation methods and to endogeneity concerns. These results contribute to the general understanding of the rarity of WOFs in manufacturing sectors and are relevant to policy initiatives supporting cooperative modes of firm organization.

Employee share ownership in SMEs – extending benefits for start-ups to conventional firms and social enterprises

PurposeAs this article reports, in recent years most legislative activities focused on start-ups, with as many as 12 European Union (EU) Member States having introduced tax incentives for employee share ownership (ESO) in this type of small and middle-sized enterprise (SME). But incentivising ESO in SMEs should be extended to all SMEs, the engine of the European economy, including those from the social economy, having shown their crucial function for the resilience of our societies during the COVID-19 pandemic.Design/methodology/approachAgainst the background of this recent and very dynamic development this article, it provides an overview of the start-up business segment in comparison to other types of companies, particularly focusing on differences with the SME sector; examines the legal regulations that hinder a broader adoption of ESO in European start-ups; presents best-practice examples to demonstrate the favourable conditions already established in some EU Member States and discussed whether these reforms and best practice examples could be extended and – as is already the case in some countries – applied to the whole SME population including social economy enterprises.FindingsSince the European Commission launched the 2011 Social Business Initiative (SBI) followed by the 2016 Start-up and Scale-up initiative, many actions to support social enterprises in view of their potential to address societal challenges and contribute to sustainable economic growth have followed. Most recently, the 2021 Social Economy Action Plan of the European Commission gave important impulses. The potential of employee buyouts offering a continuation perspective to SMEs owners looking for successors was highlighted in the 2022 EC report “Transition Pathway for Proximity and Social Economy,” calling for the implementation of Employee Stock Ownership Plans (ESOPs).Originality/valueThe situation of employee share ownership in start-ups has some parallels with that in traditional SMEs, but in many respects, they differ fundamentally. Although, on the other hand, social enterprises may also have to compete with large firms for qualified staff and face challenges when growing or scaling their activities, the reason why ESO in this enterprise segment is not widespread in the EU is altogether different. In the absence of a prescribed legal form of incorporation, social enterprises operate in various forms (be it for profit or non-profit), e.g. cooperatives, closely held limited liability companies, mutuals, associations, voluntary organisations or foundations. Therefore, this article looks into the extension of the incentives for ESO to social enterprises inasmuch as they are organised in legal forms allowing for share ownership, above all in the form of limited liability companies.

Entrepreneurship and innovation in worker cooperatives and conventional firms: the role of external cooperation

AbstractThrough the comparison of conventional firms (CFs) with worker cooperatives (WCs), which are a type of collective enterprise with significant experience in cooperation, this research aims to analyse the influence of external cooperation on the two most prominent factors for the success of enterprises: entrepreneurship and innovation. To this end, a research model is proposed based on contributions from the stakeholders’ perspective of the resource-based view of the firm and tested with data from a survey conducted on WCs and CFs located in two Spanish regions with a long tradition in the cooperative movement. The results highlight that the influence of external cooperation on innovation performance is more relevant for WCs and demonstrate that these collective firms are not disadvantaged in innovation compared to CFs. Furthermore, the results suggest that WCs have a more remarkable ability to compete and cooperate simultaneously, that is, to coopete, due to their participative nature.

Worker takeovers: a comparative analysis of employee buyouts, other worker-managed firms, and conventional firms in Uruguay

Abstract The economic crisis experienced by many developed countries over the past decade saw the emergence of the phenomenon of so-called recovered firms (RFs), or employee buyouts of failed capitalist firms (CFs). While it is obvious that one of the objectives sought by these workers is to keep their jobs, the subsequent performance of these firms is unclear. Are RFs more likely to fail than other worker managed firms (WMFs) or than CFs? Do RF workers get higher incomes than their peers in other WMFs or in CFs? This analysis is based on a linked employer–employee panel data set from Uruguayan social security administrative records. The main findings are that RFs survive longer than other WMFs or than CFs. However, RF workers receive incomes lower than those of their peers at other WMFs or at CFs. This income differential is explained partly by a brain drain process and specific human capital losses.

Frugal Entrepreneurship: Profiting With Inclusive Growth

Frugal entrepreneurship (FE) is increasingly considered an important change-maker in emerging markets, serving the unmet market needs of the poor. However, we lack an understanding of who the protagonists of the FE are, their constraints, drivers, and outcomes. Using an inductive research approach with multiple cases, we build a framework that explains constraints, drivers, and outcomes of the FE. We identify three types of constraints—resource, institutional, and scale-up constraints. FEs’ creation process involves an innovative approach and institutional support as drivers. Unlike conventional firms, the study points out the duality of outcomes of FEs—business growth and inclusive growth. Despite many constraints, FEs demonstrate proven success in providing affordable products for low-income customers and show a way of profiting with inclusive growth. Our article makes several contributions along with both theoretical and practical implications.

Corporate net working capital: evidence from Shariah compliance

PurposeThis paper examines the influence of Shariah compliance (SC) on firms' net working capital (NWC) target and adjustment speed.Design/methodology/approach The study samples of non-financial firms taken from six Gulf Cooperation countries between 2005 and 2019 and employs static and dynamic models to answer the present study research questions.FindingsThe outcomes of the study indicate that SC is one of the major determinants of the decision made by the corporation regarding their NWC. More specifically, enterprises that are compliant with restrictions within Shariah are seen to have laid targets of their NWC at a level that exceeds that of enterprises that are not compliant. Furthermore, compared to conventional firms, they seem to have higher speed when adjusting to meet set NWC targets. Submission to Islamic laws limits the choices from which an enterprise can outsource capital from existing funding instruments. Therefore, they experience a higher expected cost of bankruptcy. That being the case, such financial managers should readily maintain and adjust to higher NWC targets to meet current corporate needs, alleviate the risk of bankruptcy and lower dependency on expensive external funding options.Originality/valueTo the authors’ knowledge, this is the first study to explore the influence of SC on firms' NWC target and adjustment speed.

Employee-owned firms in France

Purpose France is the third country in Europe after Italy and Spain for the number of employee-owned firms, with some 2,600 worker cooperatives (SCOPs). The authors propose a comprehensive review of SCOPs and any barriers to their expansion.Design/methodology/approach The authors analyse relevant legislation; review the rich empirical economic literature on SCOPs; and offer new descriptive empirical evidence comparing SCOPs and other French firms.Findings SCOPs benefit from a consistent legal framework and a well-structured and supportive cooperative movement. Cooperative laws allow attracting external capital, provide barriers against degeneration and encourage profit allocations that favour investment and labour. SCOPs are distributed across a wide range of industries; are larger than conventional firms, as capital intensive, more productive and survive better. Despite this good performance their number remains modest, perhaps because of information barriers.Research limitations/implications An examination of the Italian and Spanish experiences and the relationship between SCOPs and the French labour movement might contribute to explaining the modest number of SCOPs.Originality/value The first comprehensive review of French worker cooperatives in four decades and the first with extensive comparative data on SCOPs and conventional French firms. With some of the best data on worker cooperatives in the world, findings have international relevance.

The preferential treatment of green bonds

We study the preferential treatment of green bonds in the central bank collateral framework as a climate policy instrument within a DSGE model with climate and financial frictions. In the model, green and carbon-emitting conventional firms issue defaultable corporate bonds to banks that use them as collateral, subject to haircuts determined by the central bank. A haircut reduction induces firms to increase bond issuance, investment, leverage, and default risk. Collateral policy solves a trade-off between increasing collateral supply, adverse effects on firm risk-taking, and subsidizing green investment. Optimal collateral policy is characterized by a haircut gap of 20 percentage points, which increases the green investment share and reduces emissions. However, welfare gains fall well short of what can be achieved with optimal carbon taxes. Moreover, due to elevated risk-taking of green firms, preferential treatment is a qualitatively imperfect substitute of Pigouvian taxation on emissions: if and only if the optimal emission tax can not be implemented, optimal collateral policy features a preferential treatment of green bonds.

A BRIEF ROOT CAUSE ANALYSIS OF THE DEARTH OF LABOR MANAGED FIRMS IN DEVELOPED COUNTRIES

The aging workforce and population decline give opportunity to increase the share of labor managed firms in the U.S., such as employee stock ownership plans.  Yet why are labor managed firms not a natural and organic solution to the above workforce and population challenges, instead becoming a contemporary political talking point for the likes of Senator Bernie Sanders?  At a minimum, labor managed firms are economically equal and socially preferable to conventional firms.  Yet labor managed firms exist in far fewer numbers than conventional firms.  Why is this?  Earlier arguments that labor managed firms were less efficient, less productive, and less survivable have been convincingly countered.  So, deduction suggests they are simply created far less frequently than conventional firms.  This author finds three primary hypotheses for why this imbalance exists.  First, that there is broad lack of awareness of labor managed firm options and benefits.  Second, that entrepreneur self-interest shows preference for conventional firms over labor managed firms.  And third, that co-determination complicates labor managed firm creation, in turn promoting conventional firm creation.  This piece follows a logical form to engage a subset of relevant literature in investigation of the dearth of labor managed firms.

Capital Structure Adjustment Speed in Indonesia: Does Sharia Compliance Matter?

Leverage Speed of Adjustment (henceforth SOA) has previously been studied by researchers; however, the examination of its connection with sharia law has been overlooked. The majority of the literature currently in circulation comes from the Middle East and North Africa (MENA) region and Malaysian markets, so its implications for businesses in Indonesia may not be applicable given local regulations and cultural norms. This study investigates the distinction in the debt levels and the SOA of firms in Indonesia based on compliance to sharia law. The Two-step Generalized Method of Moment (GMM) model was used to calculate the SOA in the leverage model. We discover that sharia compliance plays a role in stimulating the Indonesian firm’s level of debt and leverage SOA. To put it more precisely, sharia firms use less debt and have a slower SOA than conventional firms. Overall, Indonesian firms implement the dynamic trade-off theory in their leverage framework. Instead of relying on conventional debt, which is only available at certain levels, sharia firms must issue Islamic debt instruments to accelerate the speed of adjustment. Even after a robustness test using various sharia compliance approaches, our results remained consistent.

Special Issue: Opportunities and challenges of EU farm-to-fork strategy

In the context of the Farm-to-Fork strategy towards climate and natural resources neutralization, all players in agri-food value chain actors and stakeholders – citizens, consumers and business – cope with new challenges based on a better understanding of the complex interrelations between public health, ecosystems, value chains, consumption patterns, and planetary boundaries. From a managerial perspective, several dimensions appear crucial. The first one is circularity, i.e. the move from line to circular models which brings opportunities and threats in terms of quality management standards, procurements arrangements and skills for this circular turn. The second dimension is inclusiveness, with the renewed roles of farming systems as part of complete sustainable agri-food chains, with the core topic of social-environmental inclusivity within either existing agri-food companies or business models from scratch. The third dimension is path-dependency for conventional firms, with knowledge, technological and/or organizational lock-in, along with roles for newcomers and startups in this business model transformation, as well as the place and role of innovation ecosystems.The articles of this special issue offer constrasted view of these challenges.

Cash holdings and firm performance: empirical analysis from Shariah-compliant and conventional corporations

PurposeThis paper aims to provide a comprehensive investigation into the different roles of cash holding decisions on Shariah-compliant and non-Shariah-compliant firms’ performance. Therefore, the objective of this study is to analyze the significant relationship of liquidity on Shariah- and non-Shariah-compliant corporations.Design/methodology/approachThis study sample includes non-financial firms listed in six Gulf Cooperation Council (GCC) markets between 2005 and 2019. The study uses panel fixed effects and the dynamic generalized method of moments (system-GMM) models to test the relationship between cash holding and firm performance. The firms’ performance is measured using four widely used proxies representing book and market measures of performance including return on assets, return on equity, earnings before interest and tax to total assets and Tobin’s Q.FindingsThe results explore that the nature of the relationship between cash holdings and performance varies across Shariah-compliant and non-Shariah-compliant firms. Specifically, cash holdings are positively and significantly related to Shariah-compliant firms’ performance. However, cash reserves are not significantly related to conventional firms’ performance. These findings indicate that Shariah-compliant firms rely more on their cash holdings to avoid costly and less available external financing, meet everyday business needs and invest in profitable projects. In contrast, the value for cash holding is less important for non-Shariah-compliant firms, as their external financing options are less restricted compared to Shariah-compliant firms.Research limitations/implicationsThis study is not free from limitations. More specifically, the sample of this study comprises of firms listed in GCC countries, which share common features. It would be interesting for future research to examine the linkage between cash holdings and Shariah-compliant and conventional firms’ performance by applying a larger sample, such as firms located in countries of the Organization of Islamic Cooperation.Practical implicationsThe findings of this paper provide useful insights for managers and investors on the important role of cash management for Shariah-compliant firms. Policymakers and bankers need to develop Shariah-based financial products to ease Islamic financing sources. Moreover, the findings of this paper call for more research on the importance of liquidity management for Shariah-compliant firms.Originality/valueThis study extends the Islamic finance literature by exploring the key role of cash holdings to Shariah-compliant firms. To the best of the authors’ knowledge, this study is the first study to investigate cash holdings and performance between Shariah-compliant and non-Shariah-compliant firms.

Can worker cooperatives stabilize employment and remain financially sound during a prolonged recession?

ABSTRACT This paper uses financial accounting data of the universe of Italian worker cooperatives, from 2011 to 2018, to examine whether cooperatives were able to achieve employment stabilization in a period of prolonged recession. Since wages have experienced, in most of the period, a negative growth, we further consider whether wages’ downward flexibility had been sufficient to sustain employment stabilization and whether, under these circumstances, cooperatives’ financial solidity had weakened. Given the non-experimental setting, we proceed by defining a control group of conventional firms to which we compare the group of worker cooperatives. We find evidence that, relative to the control group, during negative demand shocks, worker cooperative contained employment drop and allowed a greater downward wage adjustment. Their profitability and equity ratio also fell by more than in the control group. We find significant-sector heterogeneity, especially in response to positive demand shocks; in Less Knowledge Intensive Services and in Constructions, which together comprise more than 70% of worker cooperatives, it is employment, rather than wages, that rises by more than in conventional firms. This suggests that in the aftermath of a prolonged recession most worker cooperatives chose to favour growth at the expense of members’ wage.

Comparative analysis of environmental performance measures and their impact on firms' financing choices

This study investigates the roles of different measures of environmental performance in firms' financing choices. Environmental performance is measured through energy-efficiency investments, energy intensity, and energy consumption disclosures, which correspond to input-based, output-based, and disclosing perspectives, respectively. We further distinguish between debt financing and equity financing since environmental information asymmetry varies across investors, affecting the pecking order of financial sources. We use Eastern European and Central Asian firm-level data from the World Bank Enterprise Surveys conducted in 2019/2020. The study sample consists of above 3000 private firms from 42 countries. The logit model shows that alternative measures of environmental performance have varying impacts on financing. For a particular measure, it affects bank and equity financing in different ways. We also find that there is a direct joint impact of environmental investments and disclosures on equity financing. Overall, our study indicates that investors prefer to invest in eco-friendly firms rather than supporting conventional firms in reducing their environmental impacts. Hence, it is required to promote government support programs and loan guarantee programs to initiate firm-level environmental practices. Further, the complementary relationship indicates that firms may choose different environmental practices to reduce environmental information uncertainty, which improves the credibility of environmental information from the investors' perspective.

A Real Utopia Under What Conditions? The Economic and Social Benefits of Workplace Democracy in Knowledge-Intensive Industries

Given consistent evidence of its social benefits but questions about its market viability, this paper examines the conditions under which workplace democracy can be understood as a “real utopia”; a viable form of organization that is both economically productive and socially welfare enhancing. Conceptualizing democratic firms as organizations with formally distributed authority and collectivist norms, we argue that democratic firms will operate more productively in knowledge intensive industries, compared with conventional firms in the same industries, because they give authority to those with relevant knowledge and encourage intrafirm information sharing. Next, focusing on intrafirm wage inequality as a key social welfare outcome, we argue that knowledge-intensive sectors are also settings where the benefits of workplace democracy are likely to be greater. Knowledge intensive industries tend to generate greater intrafirm inequality through the adoption of market-based employment policies and reliance on unique expertise, yet the formal structure and collectivist norms of democratic firms are likely to limit these mechanisms of inequality, generating inequality reductions. We test these hypotheses with longitudinal linked employer-employee data from French cooperatives and conventional firms, including firms that shift organizational structures over time. We find robust support for our hypothesis about economic performance and moderate support for our hypothesis about social performance. Funding: This research has been generously supported by the Berg Center for Ethics, the Katz International Business Center, and the Bill Nobles Fellowship, as well as a public grant overseen by the French National Research Agency (ANR) as part of the “Investissements d’Avenir” program [Reference ANR-10-EQPX-17-Centre d’accès sécurisé aux données]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2022.1622 .

Informal Control, Effective Voice and Perceptions of Work Reward Fairness in a Worker Co-operative

Worker co-operatives aim to produce a fairer distribution of work rewards than exists in conventional firms. Workers collectively own the firm and participate democratically in decisions, so should be able control rewards. However, direct participation in decisions is inefficient in larger firms. To balance democracy with efficiency, larger co-operatives combine a formal hierarchy with worker voice in decisions via elected representatives. This move is associated with the emergence of unequal informal organizational control and reward differentials. In this paper we ask how informal organization shapes control processes and worker perceptions of reward fairness in a representative democratic co-operative. We present a mixed-methods case study of a retail firm facing financial crisis which had reduced pay and benefits for workers. In this context, workers who maintained informal friendships with elected representatives on the firm’s governing board had a more effective voice in rewards than workers without such relationships. Effective voice in turn led workers to perceive their rewards as fairer. Fairness perceptions had important consequences for the co-operative spirit – the shared perception that all organization members were working towards common goals without opportunism. We explore the implications of our findings for maintaining democracy and promoting co-operative survival in times of crisis.

Can big data analytics improve the quality of decision-making in businesses?

Big data analytics (BDA) initiatives are crucial for changing conventional firms' decision-making (DM) directly into a data driven one that helps achieve the firm's objectives. Nevertheless, prior information methods analysis has not given sufficient interest in the effect of BDA use on DM merit. Using the computational ability of information analytics, this analysis examined the effect of BD on DM merit and evaluated the arbitrating impact of data analytics abilities. We gathered information through 480 software companies in America. The empirical methods demonstrated that BDA implementation had a strong effect on DM merit, where BDA had an arbitrating role in the relationship between BDA use and DM merit. Thus, companies would not only increase BDA use in business DM, but also take steps to boost the data analytics abilities, which will boost the DM merit in the direction of acquiring competitive advantage.

Underemployment due to overeducation: An analysis of worker cooperatives versus conventional firms

This research study analyses overeducation in worker cooperatives (WCs) compared to conventional firms (CFs) to determine whether there is any evidence to suggest that underemployment due to overeducation is less probable in WCs (where decisions are made democratically by worker members to maximise collective wellbeing) than in CFs in Spain. A total sample of 945 workers (315 worker members from WCs, 315 non-member workers from WCs and 315 workers from CFs) taken from the Continuous Working Life Sample from the Spanish Ministry of Inclusion, Social Security and Migration was used. The methods applied in the study include regression line comparison between WCs and CFs and logistic regression analysis. The results show that the probability of underemployment due to overeducation may be lower in worker members from WCs than in workers from CFs. Nevertheless, this is not the case for non-member workers in WCs, who display a similar level of underemployment due to overeducation as workers in CFs. This study lays the foundation for research into underemployment due to overeducation in WCs, a topic which has not yet been explored.

Theory and evidence of the impacts of Shariah debt screening on firm behaviour

PurposeThe paper aims to construct a theoretical framework to investigate whether the Shariah debt ratio screening in contemporary Shariah stock screening methodologies results in a bias towards a certain set of corporate financial behaviour for Shariah-compliant firms in the USA where access to a liquid Islamic debt market is non-existent.Design/methodology/approachThe paper extends the earnings valuation approach of Modigliani and Miller (1963) to theoretically asses the impacts of the 33% conventional debt limit on Shariah-compliant firms’ corporate financial behaviour. Then, supporting evidence is shown via empirical stylised facts of samples of Shariah-compliant firms in the USA.FindingsA theoretical floor limit to investment cut-off rates is found for US Shariah-compliant firms so that lesser projects pass their internal rate of return versus conventional firms. Subsequently, such firms consistently show the following corporate financial characteristics: above-average size, larger marginal change in size and profitability in response to a given marginal change in investments, low book-to-market ratio and lower investment rates.Research limitations/implicationsThe findings of this paper may not hold where access to a liquid Islamic capital market is present.Practical implicationsCaveat emptor. These findings may be inconsistent to the investor’s risk preferences.Social implicationsThe findings suggests that Shariah-compliant firms are more conservative compared to their conventional counterparts.Originality/valueThe paper is the first to introduce a theoretical framework to address consistent biasness in corporate financial behaviour due to the Shariah debt screening. It may prove useful for future academic studies as well as investment managers.

SUSTAINABILITY-ORIENTED TECHNOLOGY EXPLORATION: MANAGERIAL VALUES, AMBIDEXTROUS DESIGN, AND SEPARATION DRIFT

Sustainability is a key societal challenge and has become an opportunity for innovation. While start-ups are prone to enter such new territories, established companies are more hesitant to leave current trajectories and embrace uncertainty linked to sustainability-oriented exploration. We present a case of a conventional high-tech firm of an owner-manager whose strong values of universalism led him to initialise a sustainability-oriented diversification by exploring renewable energy technologies. Our longitudinal study uncovers how changes in ambidextrous organisational design and represented managerial values ultimately resulted in failed exploration. Our contribution is threefold: First, we link individual-level managerial values of universalism with organisational-level phenomena of sustainability-oriented exploration and diversification. Second, we contribute to bridging hitherto mostly separate bodies of literature on sustainability-oriented innovation and ambidexterity to better understand how conventional firms can deploy their technological capabilities for sustainability. Third, we conceptualise the “separation drift” as fading organisational separation resulting in exploration failure.