Conventional Firms Research Articles

Reexamining Performance of Socially Responsible Firms

This study reexamines the controversy surrounding “Doing well while doing well” debate within the investment literature. We retest whether investors who are dedicated to socially responsible investing will realize additional returns or will be penalized for their investment philosophy. We control for the size bias and sector concentration bias that were identified in previous studies. Our findings indicate that there is no difference in performance between the socially responsible firms and their conventional counterparts. The Investors who chose to invest in socially responsible firms will not earn additional return nor will be penalized. The findings also suggest that there is no difference in the performance of socially responsible and conventional firms over long periods versus short periods. Our findings also indicate that the constraints that are placed on an investment decision would lower or leave unchanged the maximum utility that an investor may obtain.

Do REITs use cash reserves efficiently? Evidence from corporate acquisitions

We examine the combined impact of corporate governance and excess cash holdings on the propensity of firms to become bidders and engage in value destroying acquisitions. We focus on the REIT market, due to its unique characteristics caused by regulation and the nature of the industry. The lack of active real estate takeover market should lead to entrenchment and exacerbate agency costs. However, given the mandatory high cash payout for REITs, the absence of takeover market should not cause concerns to shareholders. Our analyses reveal that unlike conventional firms, cash-rich REITs are not more likely to become acquirers and acquisitions by cash-rich REITs are not value decreasing. However, similarly to industrial firms, REITs with higher excess cash and lower insider ownership are more likely to become bidders. We interpret our results to be consistent with the hypothesis that agency problems are less severe in real estate and investors are not averse to use of excess cash by REIT managers on intra-industry acquisitions.

Do socially responsible investment indexes outperform conventional indexes?

The question of whether more Socially Responsible (SR) firms outperform or underperform other conventional firms has been debated in the economic literature. In this study, using the Socially Responsible Investment (SRI) indexes and conventional stock indexes in the US, the UK and Japan, first and second moments of firm performance distributions are estimated based on the Markov Switching (MS) model. We find two distinct regimes (bear and bull) in the SRI markets as well as the stock markets for all the three countries. These regimes occur with the same timing in both types of market. No statistical difference in means and volatilities generated from the SRI indexes and conventional indexes in either region was found. Furthermore, we find strong comovements between the two indexes in both the regimes.

Catching a wave: the formation of co-operatives in Finnish regions

This paper compares the formation rates of co-operatives and conventional firms in Finland using regional data. The Finnish co-operative “wave” that began in the mid-1990s provides a useful setting for testing the hypothesis that co-operative formation rates are higher in depressed economic conditions. The empirical results support this hypothesis. Co-operatives are formed more often in regions with high unemployment; in contrast, conventional firms are formed more often when unemployment is low and demand growth is high. Furthermore, the existence of dedicated advisory services boosts the formation of co-operatives. These results indicate that co-operatives may play a useful role in reducing unemployment and that the formation of co-operatives may be influenced by policy measures.

Revisiting the objectives of worker-managed firms: An empirical assessment

This paper provides new evidence on the objectives pursued by worker-managed firms (WMFs). The basic neoclassical model assumes that WMFs maximizes net income per member instead of total profits (Ward, 1958). Even though it has been largely criticized, the Ward model has dominated the self-management literature. Alternative models suggest that WMFs are not only concerned about income per worker but also about the level of employment. However, the empirical content of these competing theoretical models has been rarely analyzed. This paper contributes to fill this gap by estimating the parameters of a generic welfare function, following the methodology proposed by Craig and Pencavel (1993). These parameters determine the relative importance that a WMF places on income per worker vis-a-vis the level of employment. Estimates are based on a long micro-panel of Uruguayan firms covering the entire population of Uruguayan worker-managed firm and conventional firms in 31 3-digit sectors over the period April 1996-December 2005. Following a strictly neoclassical framework, but simply allowing a more general specification of the WMF goals, we show that the assumption of the basic neoclassical model of the WMF is misleading. Our results support the view that WMFs are concerned with both employment and income per worker.

Efficiency in Employee-Owned Enterprises: An Econometric Case Study of Mondragon

We provide the first econometric study of efficiency for a member of the Mondragon group of worker cooperatives. Eroski is a retail distribution chain and, most unusually, there are two distinct types of hypermarkets: (i) cooperatives with significant employee ownership and voice; and (ii) GESPAs with modest employee ownership and limited voice. For supermarkets the chain includes conventional firms with no employee ownership as well. Our key data are a panel of monthly observations from February 2006 through May 2008, a total of 9,800 observations for supermarkets and 2,150 for hypermarkets. By estimating first difference models we find that hypermarket stores with cooperative ownership grow sales significantly faster than GESPA stores. For supermarkets overall we find no significant difference in performance among the three types of stores. However, for a particular segment of the supermarket called SUPERMARKET CITY (a subgroup of small supermarkets for which having customer service employees is particularly important), cooperatives are found to outperform conventional stores. To investigate mechanisms that help explain why cooperatives are better performers we provide additional evidence that takes account of the role of the more extensive opportunities for employee involvement and training, and stronger economic incentives that exist in cooperatives. Finally, while cooperative members are better paid than their peers in comparable firms, individual-level data also show that job satisfaction is actually lower for workers in cooperatives than for GESPA workers. Though this may be a simple reflection of high worker expectation in cooperatives, cooperatives may well be indeed a high-stress work system. The overall assessment of cooperatives will need to be nuanced.

Assessing Mondragon: Stability & Managed Change in the Face of Globalization

By drawing on new interview evidence gathered during several field trips and new financial and economic data from both external and internal sources, we document and assess the changing economic importance and performance of the Mondragon group of cooperatives as well as the two largest sectors within the group. Compared to conventional firms in the Basque Country and Spain, and producer co-ops (PCs) and employee owned firms elsewhere, in general we find evidence of growing group importance and strong performance and a similarly strong record for the industrial and retail divisions. These stylized facts do not support hypotheses concerning PCs such as predictions that PCs will restrict employment and become progressively comparatively under-capitalized. In accounting for this record, we highlight key and, at times, not uncontroversial institutional developments in the group during the last 20 years or so that indicate the existence of a continuing capacity for institutional adaptation in Mondragon - an ongoing ability to innovate and make institutional adjustments to deal with emerging challenges. In addition, we provide more detailed information than before on some key distinguishing institutional mechanisms of the Mondragon group, including the extent of worker-member transfers during economic crises, the patterns of profit pooling and the type and volume of training. The aggressive and extensive use of these and related mechanisms, themselves formulated and refined only after a deliberative democratic process, may help to account for some of the outstanding features of the Mondragon group record. Overall these findings represent suggestive evidence that groups of employee-owned firms are feasible and sustainable organizational forms; in a world of declining labor power and tepid employment recovery by private firms, the institutional arrangements at Mondragon are worthy of deeper study by many including policymakers, other co-ops and other employee-owned firms.

Performance of debt free firms

PurposeThe purpose of this paper is to find out whether investors tend to reward firms that resist the urge to borrow and operated with debt free balance sheet and penalize firms that have high levels of debt.Design/methodology/approachThe performance of portfolios of debt free firms are compared to comparable portfolios of leveraged firms. Debt free firms are matched with conventional firms of the same size from the same sector. Two tests of differences in the performance are conducted for a long period and for a short period.FindingsThe results of the study indicate that investments in portfolios of debt free firms tend to generate higher returns than investments in their peers of portfolios of leveraged firms over long and short periods. The results have clear implications on investment decisions and investment performance. Investors tend to reward firms that resist the urge to borrow heavily and operate with debt free balance sheet and penalize firms that have high level of debt.Originality/valueThe results of the study can be of great interest to investors as well as firms specially during periods of financial crises. It raises again the question as to what is the optimal level of debt a firm should have in normal times and during periods of economic or financial crises.

The determinants of corporate sustainability performance

AbstractThis paper investigates the factors that drive high levels of corporate sustainability performance (CSP), as proxied by membership of the Dow Jones Sustainability World Index. Using a stakeholder framework, we examine the incentives for US firms to invest in sustainability principles and develop a number of hypotheses that relate CSP to firm‐specific characteristics. Our results indicate that leading CSP firms are significantly larger, have higher levels of growth and a higher return on equity than conventional firms. Contrary to our predictions, leading CSP firms do not have greater free cash flows or lower leverage than other firms.

Pre-clusterization in emerging markets: the Toyota group's entry process in China

Drawing on network analysis and informing the internationalization process of Japanese firms, this study introduces an ad hoc entry strategy, termed ‘pre-clusterization’. Unlike conventional keiretsu firms, competitive suppliers in a well-integrated network can enter a new market and begin clustering in a location that the core firm targets before the full entry of the core firm. The process of pre-clusterization is illustrated using a case study of the Toyota Group in China. A number of testable propositions are presented. Findings reveal the importance of strategic collective actions when coping with intensive competition and uncertainty in emerging market contexts.

Doing business in the age of conscious capitalism

PurposeThe purpose of this paper is to describe the concept of “Conscious Capitalism,” which refers to a new, more enlightened approach to business purpose and management.Design/methodology/approachThe paper describes how the context for business has changed in fundamental ways in the past two decades, calling for a new approach to business that reflects rising levels of consciousness among customers and employees as well as multiple and deepening challenges facing the world today. It is imperative that business gets on the right side of society rather than continuing to add to societal burdens, as is too often the case. Conscious capitalism is not synonymous with corporate social responsibility (CSR); since society is recognized as an important, even the primary stakeholder, the core business itself must by definition be socially responsible. A conscious approach to business is based on the adoption of a higher purpose that transcends profits, a stakeholder rather than shareholder orientation, and conscious, service‐oriented leadership.FindingsBusinesses that adopt this approach not only create multiple types of long‐term wealth for society at large (including social, emotional, intellectual and even spiritual wealth); but they also dramatically outperform conventional firms on financial measures of performance. The world of conscious business is thus largely devoid of the trade‐offs that are commonly made and accepted as part of business‐as‐usual.Practical implicationsThe paper concludes by recognizing that a conscious approach to business is highly compatible with the ancient wisdom found in Indian and other traditions.Originality/valueThis paper shows that there is the potential to enter a golden age of leadership thinking that blends the best of modern Western practice (geared towards efficiencies) and ancient Eastern wisdom (focused on effectiveness).

Shadow price of capital and the Furubotn–Pejovich effect: Some empirical evidence for Italian wine cooperatives

AbstractWe test the underinvestment hypothesis (the so‐called Furubotn–Pejovich effect) from the specialized literature on co‐ops by comparing the shadow price of capital and the dual capacity utilization index for a panel of Italian cooperative and conventional firms, 1996–2003. The results do not show any difference between co‐ops and conventional firms in this respect. Copyright © 2008 John Wiley & Sons, Ltd.

Entry Strategies of Partnerships versus Conventional Firms

From 1997 to 2001 the number of nonemployer businesses, mostly partnerships, grew faster than conventional firms in the United States, a country with the mildest asymmetries between the two types of enterprises with respect to taxation, administrative entry barriers, and other institutional aspects. Partnerships are smaller than conventional firms, and their different speeds of net entry could be the result of internal organization that makes them swifter and better equipped to be fast‐growing industries. In a continuous‐time stochastic environment with sunk costs, we model entry as a growth option. Partnerships and conventional firms display specific patterns in terms of output price and size in that they appear to react in diverse fashions to market uncertainty. In most cases, the partnership is less risky and better suited to enter under conditions of high volatility, as between 1997 and 2001 in the United States.

Are Workers' Enterprises Entry Policies Conventional?

Abstract. One of the reasons why workers' enterprises (WE) still represent a relevant chunk of the economy may lay in some affinities with conventional profit‐maximizing firms. To provide a solid basis to this presumption, we compare the entry policies of WEs and conventional firms when size is set at entry and kept fixed afterwards. Even though short‐run differences remain between WEs and conventional firms, a long‐run coincidence appears in an uncertain dynamic environment. Endogenizing size and time of entry we see that the two kinds of firms enter at the same trigger market price and size. Both of them enter earlier and choose a dimension larger than the minimum efficient scale. This generalized coincidence may be another way to explain why WEs still make for an important share of the economy despite the ongoing mantra of their imminent demise.

Endogenous formation of coops and cooperative leagues

The labor-managed Mondragon cooperatives in the Basque country, and La Lega coops concentrated in North Central Italy, are grouped into leagues that enable them to reap economies of scale in key services such as R&D, marketing and finance. These leagues are relatively rare and there are fewer than a dozen of them globally. We develop a game-theoretic model of league formation to capture some of the strategic incentives behind the formation of labor-managed cooperatives (coops) and their agglomeration into a league. We then compare these incentives with those of conventional profit-maximizing firms to organize into a league. The main result of this paper shows that a divergence in these incentives stemming from their organizational differences may lead to the formation of a league of firms but not one of coops. This turns out to be true even though the coop has lower costs of production and the existence of a coop league would have been socially efficient. Anticipating the non-existence of a coop league then creates a disincentive for individual agents to form coops in the first place. This explains the relative rarity of coops, competing individually or as a part of a league, with conventional firms in imperfect markets.

The U.S. Organic Handling Sector in 2004: Baseline Findings of the Nationwide Survey of Organic Manufacturers, Processors, and Distributors

The organic sector has expanded rapidly over the last decade, as retail sales of organic food increased to $15.7 billion in 2006. As sales have grown, so have the number and types of outlets selling organic products. USDA’s Economic Research Service surveyed certified organic intermediaries in the United States to collect information on basic characteristics of the sector in 2004, as well as its marketing and procurement practices. This report uses the survey findings to present a baseline view of the organic handling sector. A large share of organic handlers are mixed operations that handle both organic and conventional products, and most began as conventional firms that converted to handling organic products. Most organic products are sold domestically, with nearly three-quarters sold nationally or regionally. More than three-quarters of the firms are independent, and most are small. Handlers seek suppliers with a reputation for providing high-quality products. Most transactions between handlers and suppliers occur under contract, reportedly so that handlers can procure ingredients essential for their businesses.

The Long-Horizon Performance of REIT Mergers

We study long-horizon shareholder returns in a comprehensive sample of Real Estate Investment Trust (REIT) mergers, to test whether or not the anomaly of post-merger underperformance observed in conventional firms applies to the case of REITs. Constructing synthetic benchmark portfolios controlling for firm size and for book-to-market value ratio, we find that 60-month buy-and-hold abnormal returns for REIT acquirers are significantly negative at approximately −10%, supporting the position that REIT merger acquirers underperform non-merging REITs in the long run. We find no evidence to challenge previous studies reporting positive announcement period returns for acquirers when the target is privately held, but we do find evidence that these positive returns do not persist. The long term performance of acquiring REITs is approximately the same whether the target is public or private.

Conditional Volatility of Equity Real Estate Investment Trust Returns: A Pre- and Post-1993 Comparison

We examine the dynamic behavior of Equity Real Estate Investment Trust (EREIT) volatility in a GARCH context 1972–2006 using monthly EREIT returns, and comparing volatility performance for “early” Equity REITs 1972–1992 with that of “modern” EREITs 1993–2006. Consistent with findings for conventional firms, we find that EREIT conditional volatility is time-varying, persistent, and predictable. There is a positive relationship between expected return and expected risk in EREIT stocks pre-1993, but the relationship disappears after 1993. We find no evidence that negative shocks affect EREIT volatility differently from positive ones in either time period. Different from reported results for conventional firms, we find that changes in the conditional volatility of fundamental macroeconomic variables have strong explanatory value for future changes in EREIT volatility. Finally, comparing EREIT volatility performance with volatility in the Russell 2000 Index, a proxy for small stocks, we find that EREIT volatility behaves differently from that of small stocks in many respects, indicating that risks in the small stock index cannot effectively proxy for risks in the EREIT market.

Are Workers' Enterprises Entry Policies Conventional

One of the reasons why workers' enterprises (WE) still represent a relevant chunk of the economy may lay in some affinities with conventional profit-maximizing firms. To provide a solid basis to this presumption, we compare the entry policies of WEs and conventional firms when size is set at entry and kept fixed afterwards. Even though short-run differences remain between WEs and conventional firms, a long-run coincidence appears in an uncertain dynamic environment. Endogenizing size and time of entry we see that the two kinds of firms enter at the same trigger market price and size. Both of them enter earlier and choose a dimension larger than the minimum efficient scale. This generalized coincidence may be another way to explain why WEs still make for an important share of the economy despite the ongoing mantra of their imminent demise.

Congestion and Fiscal Policy in a Two-Sector Economy with Public Capital: A Quantitative Assessment

This paper analyzes the role of public capital when the services it yields is subject to two forms of congestion, which we characterize as relative and aggregate. We employ a two-sector growth model in which there are conventional profit-maximizing private firms, together with "public firms", whose objective is to produce a specified quantity of government investment goods --- determined by government policy --- at minimum cost. We characterize the equilibrium dynamics, and analyze two forms of fiscal disturbances --- an increase in public investment, and a decrease in the tax on capital income --- by simulating a calibrated economy. We contrast the effects of these two types of congestion on both the existing steady-state equilibrium, as well as for the effectiveness of fiscal policy.