Firm Costs Research Articles

SOEs reform and capital efficiency in China: A structural analysis

This paper investigates the effect of state-owned enterprises reform, a policy phrased as “grasping the large, letting the small go”, on firms’ capital efficiency in Chinese industries from 1998–2007. First, we present several stylized facts on investment rates in state and private firms. Second, a dynamic programming problem is proposed and key structural parameters are recovered through simulated moment matching method, so the estimated dynamic model is able to replicate the stylized facts that are directly observable from the firm-level data. Our quantitative analysis shows that the conversion of state firms into private ones reduces capital adjustment costs. Particularly, state firms’ quadratic adjustment cost declines significantly almost by half, and the fixed cost decreases slightly. These findings are robust in various specifications. Hence, the reform in state firms leads to increased capital efficiency. Last, the counterfactual analysis suggests that state and private firm’s output would increase about 9.60% and 1.87% if the capital adjustment costs in state firms were lowered to the same levels in private firms.

Cross-regional collaborative governance in the process of pollution industry transfer: The case of enclave parks in China

To promote the effectiveness of cross-regional collaborative governance of pollution firm transfer, a stochastic evolutionary game model among three sectors (flying out parks, pollution firms, and flying in parks) was proposed. According to the three policy goals, three paths of collaborative governance were investigated using numerical simulations. Our findings focus on the following three aspects: (i) If policymakers want to urge more parks and pollution firms in the three sectors to choose a cooperation strategy, additional relocation subsidies from superior governments for pollution firms have the most remarkable effect. However, excessive subsidies will push flying out parks to inhibit the transfer of pollution firms. (ii) If policymakers intendto urge parks and pollution firms to cooperate quickly, increasing the environmental costs of firms will play key role. Notably, even if the environmental costs are low, they can still considerably and positively affect choosing a transfer strategy of for pollution firms. (iii) If policymakers expect defection parks and pollution firms to be as few as possible during the regulation process, the cost-sharing mechanism with only two sectors (flying in parks and flying out parks) is invalid. Introducing higher-level departments or other sectors for cost-sharing to escape the current dilemma is necessary.

Accounting-Driven Bank Monitoring and Firms’ Debt Structure: Evidence from IFRS 9 Adoption

International Financial Reporting Standard (IFRS) 9 is of practical relevance to banks because it requires intense monitoring of borrowers to record timely loan losses. Using data from 50 countries, we find that accounting-driven bank monitoring due to IFRS 9 adoption reduces firms’ reliance on bank debt relative to public debt. This finding is consistent with firms experiencing more costly bank monitoring after a shift in regulatory reporting that requires banks to monitor borrowers more intensely. In further analyses, we find that the negative effect of IFRS 9 adoption on bank debt reliance is more pronounced with more stringent regulatory supervision of banks, consistent with regulatory stringency exacerbating costly bank monitoring for firms. We also find that the negative effect is stronger when firms can more easily switch from bank debt to public debt financing, consistent with the relevance of switching costs in firms’ decisions to avoid costly bank monitoring. This paper was accepted by Suraj Srinivasan, accounting. Funding: This work was supported by the National Natural Science Foundation of China [Grant 71802205], the Program for Innovation Research, and the Program for Young Talents Cultivation [Grant QYP202103] in Central University of Finance and Economics. Supplemental Material: Data and the online appendix are available at https://doi.org/10.1287/mnsc.2022.4628 .

Firm's cost of debt firstly changes conservatism and then leads the choices of future diversification strategies: Evidence from Asian countries

AbstractThis study investigates how firms’ debt cost affects their conservatism in the first stage, and then leads their future strategies in the second stage. Moreover, it shows that firms would likely ignore their conservatism when choosing a strategy, especially diversification. Then, it presents two interrelated novelties. First, firms operate with a low cost of debt, constructing their high conservatism. As a result, they would likely choose a cost‐reduction strategy. Conversely, firms with low conservatism usually choose diversification strategies because they are at the lowest risk. Second, this study highlights that the firms’ diversification strategies are a conundrum while considering the cost of debt and conservatism when applied by firms operating the business in developing countries. Operating in emerging economies, firms could choose a higher debt cost and simultaneously ignore conservatism, maintaining their creditors as funding. Moreover, this research examines Asian countries' data using ordinary least‐square (OLS) and two‐stage last‐square (2‐SLS). In addition, 2‐SLS outperforms in the staged‐associative examinations. Thus, this research reveals that the cost of debt, conservatism and chosen strategies relate to simple staging. As a result, they acquire the highest cost of debt, with the high‐risk level affecting their weighted cost of capital. Finally, this research infers that firms' costs of debt and conservatism are not mutually exclusive and sequentially affect their future strategic choices. It, therefore, suggests that when firms choose diversification strategies, they might probably take a high cost of debt, accompanied by a highly conservative level.

The EU Sustainable Finance Framework in Light of International Standards

ABSTRACT This paper analyses the relationship between the EU sustainable finance legal framework and the most common international environmental, social, and governance standards. We find that standards included in the EU sustainable finance legal framework partly overlap with the international environmental, social and governance standards, while diverging as to the details. This overlap creates frictions, given that financial service providers need to decide which of the overlapping, yet partly diverging, standards they apply. The EU environmental taxonomy presents unique features and a higher level of sophistication when compared to the international environmental, social and governance standards. This may result in both upsides and downsides. On the upside, the EU sustainable finance legal framework could function as a pacemaker and facilitate impact measurement across the industry, while on the downside, we see additional costs for firms and resistance against the granular EU approach. At the same time, the EU sustainable finance legal framework lacks details on the social and governance dimensions. Here, reference to the international standards compensates for the lack of an EU social and governance taxonomy. While this allows for alignment of EU and international social and governance-oriented investors, a greater degree of sophistication at the EU level could enhance the potential for impact measurement—a particularly important aspect for socially sustainable investments.

Digital transformation and firm cost stickiness: Evidence from China

Digital transformation has increasingly become an important determinant in business decision-making. Using the data of Chinese listed companies from 2011 to 2020, this paper investigates the impact of digital transformation on cost stickiness. The empirical results demonstrate that digital transformation can significantly inhibit cost stickiness by reducing adjustment cost and management optimistic expectation, and the inhibiting effect is persistent. Moreover, digital transformation has a more significant inhibiting effect on the non-state-owned firm and the material resource cost stickiness. This paper provides a new perspective for cost reduction promotes the deep integration of digital and real economies.

The importance of labour market responses, competitiveness impacts, and revenue recycling in determining the political economy costs of broad carbon taxation in the UK

Despite broad acceptance of the need to drastically reduce carbon emissions and limit global warming, political debates persist regarding the acceptability of actions to internalise carbon costs given potential impacts on the cost-of-living and income generation. We present fundamental macroeconomic and more complex computable general equilibrium analyses to consider how introducing broad carbon taxation might impact key macroeconomic indicators, taking the UK as an applied example. One key insight is that, with no other policy intervention, such a move introduces contractionary pressure through increases in consumer prices that reduces GDP, employment, and household spending, and erodes government revenue gains. The extent of contraction depends on the degree of resistance in labour markets to real wage rate reductions alongside substitutability away from taxed energy in determining prices, and on consequent export demand responses. A second is that where government prioritises balancing its budget, partial recycling of carbon tax revenues aimed at moderating negative impacts on firm costs and household real spending power can reduce wider economy losses. However, this is limited by wage bargaining and domestic consumption responses in a labour supply constrained and very open economy, with income tax recycling minimising macroeconomic losses at the cost of increasingly regressive outcomes.

Managerial Delegation, Product R&D and Subsidies on R&D Investment Costs

Abstract This paper studies owners’ optimal designs of incentive schemes in a market with managerial firms competing in prices as well as in product research and development (R&D) investment in which owners use a linear combination of gross profits which are defined to be sales revenue minus production costs, sales revenue and R&D costs to evaluate managers’ performances. The main contribution of our research is showing that owners not only deflate R&D costs to induce managers to invest more in product R&D but also place different weights on production costs and R&D costs optimally. If product R&D is highly efficient, managerial delegation improves consumers’ surplus at cost of firms’ profits which is sharply contrasting to the standard conclusion of sales delegation under price competition. Moreover, managerial delegation may achieve Pareto efficiency if product R&D is mildly inefficient. Finally, we find that copyright protection benefits consumers’ surplus but could reduce social welfare.

The impact of digital transformation on corporate sustainability- new evidence from Chinese listed companies

As Industry 4.0 is seen as the core industrial stage for achieving sustainable development, more and more scholars are exploring the practical effects of Industry 4.0. This paper evaluates the impact of digital transformation on business sustainability, explores whether digital transformation breaks down perceptions, and examines the mechanisms by which it works. First, we measured the digital transformation of each firm using textual analysis. and found that the coefficient of digital transformation is 0.006 on corporate sustainability at the 1% significant level. Secondly, we found that digital transformation eases knowledge flow barriers and makes knowledge more accessible to firms. Firms with higher digital transformation attract more skilled people, which can create talent barriers. Digital transformation can exacerbate firms’ industry monopolies, while increasing the proportion of boardroom women and the inclusion of older members sends positive signals to outsiders. Finally, we find that low costs, high labor productivity, high innovation and low cost of sales are important channels for digital transformation. In addition, digital transformation increases the management costs of firms.

The rise of robots and the fall of cost stickiness: Evidence from Chinese manufacturers

AbstractIndustrial robots are increasingly used to perform tasks traditionally assigned to humans. Using a sample of Chinese manufacturers, we examine the impact of robot adoption on firm cost stickiness. We find that robot adoption is associated with less sticky costs. The negative impact of robot adoption on cost stickiness is particularly meaningful for state‐owned enterprises and firms with higher labour costs, and becomes significantly stronger after the enactment of China's Labour Contract Law, which significantly increases labour adjustment costs. These findings are consistent with the conjecture that the adoption of robots allows firms to reduce their overall labour adjustment costs.

Reputation and liability in experience goods markets with imperfect monitoring

This paper investigates the interaction of reputation and product liabilities from a new perspective. We introduce a reputation model in an experience good market with imperfect monitoring, in which reputation incentives without product liability are not sufficient for inducing a desired outcome. Even a firm with high market reputation will cheat consumers, and the reputation will eventually collapse. We then introduce two product liabilities into the reputation model: strict liability and negligence rule . It is shown that under certain conditions, these two liabilities can both improve firms’ incentives and final outcomes. What is the best product liability depends on the costs of firms and courts as well as courts’ professional level. The paper also sheds light on which liability regime is optimal in this reputational setting. • We investigate the interaction of reputation and product liabilities from a new perspective. • We introduce a reputation model in an experience good market with imperfect monitoring, in which reputation incentives without product liability are not sufficient for inducing a desired outcome. • Under certain conditions, strict liability and negligence rule can both improve firms’ incentives and final outcomes. • What is the best product liability depends on the costs of firms and courts as well as courts’ professional level.

The Digitisation of a Firm Process and Its Impact on Corporate Governance

Digitisation can be considered as the continuing convergence of both real and virtual worlds by transforming data from analogue to electronic format. This has been the primary driver of innovation and change in various sectors of the economy. The exponentially growing amount of data has made it essential for firms to transform them into digital format for ensuring better flow and sharing of information across the organisation. Digitisation has been referred to as the process of converting various diverse forms of information, such as text, images, sound or voice, into an electronic format that leads to improved operations and reduced costs for firms. The research paper has discussed this digitisation process of a firm and analysed its consequent impact on the corporate governance. In this regard, various articles have been explored for the purposes of understanding how digitisation can improve or threaten corporate governance of firms. Digitisation has created some big disruptive storms some of which have resulted in a reimagined manner of doing business, affecting demand and supply principles in any company. As a result, in order to gain market confidence, businesses must establish credibility and integrity.

Unravelling the ‘race to the bottom’ argument: Foreign direct investment and different types of labour rights

Does foreign direct investment (FDI) lead to better or worse labour standards in developing countries? We argue that it depends on the type of labour right, and how costly it is to protect it. We propose that governments are likely to follow international pressure and ‘climb to the top’ of improved labour standards, but only for those rights that do not incur direct costs to foreign investors, such as collective bargaining rights. In contrast, we expect that governments engage in a ’race to the bottom’ when it comes to rights that bear immediate costs for firms, such as overtime pay. To test our argument, we use novel data to distinguish between the legal protection of (1) fair working contracts, (2) adequate working time, (3) dismissal protections, which are more costly; versus (4) collective worker representation, and (5) industrial action rights, which are relatively cheaper to grant. Our panel data analysis for 75 developing countries (1982–2010) shows that higher FDI stock and flow is indeed connected to better protection of collective rights, while FDI flow is connected to a decline in relatively expensive outcome rights. These results remain robust across a range of model specifications.

Media visibility and corporate social responsibility investment evidence in Spain

AbstractDespite the extensive research in both the determinants and the results of corporate social responsibility (CSR), relatively few studies have considered extra‐legal institutions as potential determinants of CSR. Our work fills this gap by looking at how media attention affects CSR over a long‐term period in a continental European setting. Our results show that media coverage positively affects CSR. Additional scrutiny triggered by media coverage encourages dominant owners to signal their commitment to limiting self‐dealing transactions and their orientation toward stakeholders' needs through CSR investments. Additionally, our results reveal that this signaling device offers greater benefits and lower costs in firms where controlling owners show a voting‐cash flow wedge. Our results are relevant to different actors such as investors, auditors, and policy makers as they provide solid evidence that media coverage is an important driver of CSR orientation in a continental European setting.

Applying Option Portfolio Strategy to Manage Crude Oil Trade Risk

Since February this year, the conflict between Russia, one of the important exporters of crude oil, and Ukraine has gradually intensified, causing the international market to worry about the supply of crude oil. Together with the speculation in the United States, international oil prices have been moving higher. We use an option portfolio strategy for hedging to offset the increased costs of crude oil purchaser firms with profits in the financial markets. We use a binomial tree option pricing model to calculate the crude oil option price and use it to derive its delta value. The option portfolio is constructed by selecting real and flat options based on the delta-neutral results. After comparing the results of the analysis, the call inverse ratio spread option is optimal and the bull call option is the next best. The protective strategy constructed using crude oil futures has good risk control but limited profitability. Finally, put forward suggestions for enterprises who uses derivatives for hedging.

Economic policy uncertainty, social network, and the cost of corporate debt

ABSTRACT This paper is the first to construct social network indicators that bring together the individual and organizational levels to examine how social networks can moderate the adverse effects of EPU on corporate finance. An empirical study of Chinese A-share listed firms from 2007–2018 shows that the corporate debt costs of firms with a better social network are less exposed to a poor economic policy uncertainty environment relative to firms with a poor social network, and the results pass a series of robustness tests.

지역협회 단위 판유리 공동구매 및 수·배송 물류운영

Purpose This study aims to propose ways to reduce the cost of purchasing negative plate glass through the group purchase of required amounts under the leadership of local associations of processed plate glass and plans to improve the profit structure of local processed plate glass manufacturers through logistics management base on joint transportation and delivery. Methods A model was developed for the costs of purchasing negative plate glass, regular transportation and delivery cost, costs of returning vehicles to the starting point after regular transportation and delivery. Results A reduction in purchase price and logistics costs through the application and analysis of numbers in cases of group purchase and joint logistics for negative plate glass under the leadership of local association by zones proposed in the study compared with old cases in which the member companies of a local association purchased negative plate glass, transported and delivered and had vehicles returned after transportation and delivery separately. Conclusion Group purchase and logistics management based on joint transportation and delivery under the leadership of a local association of processed plate glass are expected to improve the profit structure through the reduction of purchase prices, transportation and delivery costs, and returning vehicle costs for the member firms.

Responsiveness of Firm Productivity to Social Cost of Oil and Gas Firms in Nigeria

Responsiveness of Firm Productivity to Social Cost of Oil and Gas Firms in Nigeria

The CO2 cost pass-through in nonlinear emission trading schemes

In this paper, we theoretically study the issues that how nonlinear structures of energy market affect CO2 costs of energy firms being passed through to energy prices in emission trading schemes. We set up oligopoly models to investigate CO2 cost pass-through under different emission right allocations, characterize analytic derivations of CO2 cost pass-through rates and then explore the connections between CO2 pass-through rates and nonlinear market structures. Our findings suggest that the CO2 cost pass-though rates are not only dependent on the elasticities of energy demand and supply, but largely determined by the convexity of demand curve and the competition intensity of energy market. More importantly, an economic curiosity (CO2 cost pass-through overshifting) is also observed in the emission trading schemes under suitable market conditions. The existence of CO2 cost pass-through overshifting provides regulators and policy makers important information that the emission trading schemes are at the risk of imperfect competition and may require further policy adjustments.

Анализ влияния пандемии COVID-19 на распространение цифровых технологий в корпоративном секторе Российской Федерации

The purpose of this article is to analyze the impact of the COVID-19 pandemic on the spread of digital technologies in the corporate sector of the Russian Federation. The authors suggested and tested the method of statistical measurement of the spread of digital technologies based on the indicator of the corresponding costs of firms. The costs of firms for the introduction and use of digital technologies are analyzed in the period from 2015 to 2020 in two sections: by types of costs, as well as by types of economic activity, which account for more than 80% of the total value of the indicator for the Russian Federation. In order to make a comprehensive analysis of the impact of the COVID-19 pandemic on the digitalization of the corporate sector in the Russian Federation, in addition to official statistical data, the authors use collections of analytical materials, including a brief overview of the study of the Central Bank of the Russian Federation on changes in business processes after the COVID-19 pandemic. According to the results of the analysis, it was revealed that the COVID-19 pandemic has an ambiguous impact on the digitalization process. On the one hand, the COVID-19 pandemic has certainly become an accelerator of digital development in certain areas, for example, the introduction of cloud solutions that ensure the volume to remote work and distance learning significantly increased. On the other hand, the “coronacrisis” led to a reduction in expenses, including on the IT infrastructure of enterprises whose revenue decreased during this period. The results of the analysis can be used in future studies of modeling and forecasting trends of digital transformation of the economy in the corporate sector in the Russian Federation.