Euronext Lisbon Research Articles

Understanding the political connections of Portuguese companies through their board members

PurposeThis study aims to analyse the political connections of Portuguese companies through the members of the board of directors, exploring how these connections influence, in particular, the composition and characteristics of the boards.Design/methodology/approachThe research used a strategy based on analysing the financial statements and curriculum vitae of the directors of Portuguese companies listed on Euronext Lisbon from 2014 to 2019. The political connections of board members were examined, considering the variables identified in the existing literature.FindingsThe results indicate that companies with political connections maintain these relationships for long periods and have a greater number of members on the board of directors compared to companies without such connections. Directors with political experience tend to occupy non-executive positions, suggesting that companies may value political contacts more than the management skills of these directors. It was also found that there are politically connected directors who belong to multiple boards and that women appointed to the board are less likely to have a political background, reflecting male dominance in Portuguese politics.Research limitations/implicationsThe main limitations of this study include the small number of listed companies in the sample, which may affect the statistical robustness of the results, as well as the use of secondary sources, which may not capture all relevant policy linkages. In addition, the results are specific to the Portuguese context and may not be generalisable to other countries or other regions of the world.Originality/valueThis study contributes to the understanding of political connections in Portuguese companies, offering valuable insights into how these connections influence board composition and can impact corporate strategy and governance. The findings of this study can be especially useful for business leaders looking to optimise the formation of their boards of directors.

The Influence of Social Responsibility Practices on Tax Planning: An Empirical Study for Companies Listed on Euronext Lisbon

This paper analyzes the influence of social responsibility practices on the development of tax planning activities in companies listed on Euronext Lisbon. Although scientific research into social responsibility and tax planning is not new, scientific studies into the relationship between these two themes is a developing area of research that still raises many questions. This study was carried out on a sample of 30 companies listed on Euronext Lisbon, using data for the 2018 and 2019 periods. The hypotheses were formulated based on a literature review on this subject. A multiple linear regression model was developed to validate the hypotheses. The results show that the social, corporate governance, environmental, or economic components of corporate social responsibility do not influence tax planning. However, the results show that company size negatively impacts tax planning, i.e., larger companies have lower effective tax rates. In the sample studied, larger companies implemented more tax planning strategies. In this way, this study can complement the understanding of the relationship between social responsibility practices and tax planning activities in Portugal and internationally.

Determinants of risks disclosure in non-financial companies. Evidence from Portuguese capital market

The present study aims to determine the level of disclosure about financial risks in Portuguese non-financial companies and to identify the determinants of the level of disclosure. To carry out this study, the research methodology used was the content analysis of the reports and accounts, for the period 2017, of 40 non-financial companies listed on Euronext Lisbon, using a disclosure index for financial risks, created based on the requirements contained in the International Financial Reporting Standard No. 7 - Financial Instruments: Disclosures. After the content analysis, to identify the determining factors of disclosure level, a linear regression model was built to relate certain characteristics of the companies with the disclosure level presented. It was possible to conclude that the companies under study have an average disclosure level of about 50% of the requirements contained in IFRS 7 and that the size of companies and the concentration of capital significantly and positively influence the level of disclosure about financial risks. Indebtedness was also a determinant factor, but with a negative sign, being an uncommon result in relation to most other studies.

Impact of ISO 14001 and ISO 9001 adoption on corporate performance: evidence on a bank-based system

PurposeThis paper aims to analyze the impact of the adoption of ISO 14001 and ISO 9001 on the performance of Portuguese companies. The sample includes the companies listed on Euronext Lisbon, with economic, financial and specific information – the specific being environmental information and quality information – for the period between 2015 and 2019, which corresponds to the post-Troika period when some economic growth started to be witnessed. The specific information of each area is translated into the environmental certification by the ISO 14001 standard, the quality certification by the ISO 9001 standard, and sustainability reports.Design/methodology/approachTo achieve this aim, four variables were used as a measure of the companies' performance, Return on Assets (ROA), Return on Equity (ROE); Tobin's Q and EBITDA Margin. With this data, different panel models were tested to validate if ISO 9001 and ISO 14001 certifications impact Portuguese listed companies performance. Specifically, the authors have used the Generalized Method of Moments, GMM-System, an estimation method proposed by Arellano and Bover (1995) and Blundell and Bond (1998).FindingsThe results show that, in general, the environment and quality variables fail to explain the dependent variables, that is, ISO certifications do not provide positive or negative variations in the performance of companies, suggesting that they are not yet as much for civil society, as well as for current or potential shareholders. When used as an independent variable, certification according to the ISO 14001 or 9001 standards, negative and significant oscillations were verified in the dependent variable, MgEBITDA, suggesting that only for managers this variable is determinant, but with a negative impact, given the high costs, it entails without pressure from other stakeholders.Originality/valueThis study is the first to analyze the impact of the adoption of ISO 14001 and ISO 9001 on Portuguese companies' performance. This empirical study aims to show all investors, managers, regulators and civil society itself the long path that still needs to be taken toward sustainability.

EXPLANATORY FACTORS OF THE COMPLIANCE WITH IFRS 16 (LEASES) DISCLOSURE REQUIREMENTS: EVIDENCE FROM THE PORTUGUESE STOCK MARKET

This paper aims to analyze the degree of compliance with the IFRS 16 disclosure requirements, in the first year of mandatory adoption of IFRS 16, and to identify its determinant factors. As methodology, we performed a content analysis of the reports and accounts of a sample of companies listed on Euronext Lisbon. A multiple linear regression model was also developed, which assumes the compliance disclosure index as a dependent variable as some companies’ characteristics as potential explanatory factors. Results of descriptive statistics indicate that, in the first year of adoption of IFRS 16, the average level of compliance with disclosure requirements is approximately 0.66. The multivariate analyses reveals that the type of auditor significantly positively influences the compliance disclosure index and therefore we conclude that entities with accounts audited by one of the Big Four exhibit a higher level of disclosure than those that are audited by other audit firms.

The investors' prospects on mandatory auditor rotation: evidence from Euronext Lisbon

<abstract> <p>The costs and benefits of mandatory auditor rotation (audit firm rotation and partner rotation) are far from being conclusive. This paper helps fill this gap in the literature by examining the relationship between mandatory auditor rotation and firms' stock market performance in the Portuguese context. Using a sample of listed companies in Portugal from 2009 to 2020, the main finding indicates that mandatory audit firm rotation is positively and significantly related to the firm's market performance. The evidence gathered suggests investors perceive mandatory audit firm rotation as a mechanism for improving audit quality. Controlling for the engagement partner rotation, we do not find that the rotation rule has a positive effect on firms' market performance. The net benefits of the mandatory audit rotation rule seem to be driven by the mandatory change of the audit firm, with improvements in market perceptions of earnings. Robustness tests suggest that the signal and significance of the association of firms' market performance and mandatory audit firm rotation holds in the presence of corporate governance mechanisms. Also, the audit experience of the departing and incoming partners does not interact with the relationship between mandatory partner rotation and firms' market performance.</p> </abstract>

Governance and social responsibility: what factors impact corporate performance in a small banking-oriented country?

PurposeThis paper aims to analyze the corporate governance and corporate social responsibility (CSR) determinants of the Portuguese listed companies’ performance, considering a different point of view by managers, shareholders and other external stakeholders and investors.Design/methodology/approachTo achieve this aim, the authors have used a sample of 34 nonfinancial listed companies in Euronext Lisbon between 2015 and 2020. The authors use the panel data methodology to test the hypotheses formulated according to the literature review, specifically the generalized method of moments (GMM) system estimation model proposed by Arellano and Bond (1991).FindingsThe main results point out that the determinants of the corporate performance vary depending on the dependent variable considered. From the managers’ perspective, the existence of an audit committee and expenses with the environment increase costs and reduce results, negatively influencing corporate performance, but the company’s maturity adds synergies in resource management and positively influences performance. Shareholders consider that gender diversity and board independence positively influence performance, whereas, for external stakeholders and long-term investors, gender diversity and the social responsibility committee harm the performance of Portuguese companies. However, environmental and social expenditures have a positive effect, showing that the market’s perception is that, in the long run, it is essential to eradicate poverty and protect the environment.Originality/valueTo the best of the authors’ knowledge, this study is the first one to analyze corporate governance and CSR determinants on the performance of listed Portuguese companies. This study shows that in a small banking-oriented country, there is still a long way to go in terms of increasing social responsibility and governance among different stakeholders. It is essential to promote actions that lead to effective governance and awareness of social responsibility.

Corporate governance disclosure: Empirical evidence in the Portuguese capital market

The corporate governance theme has been a subject of great debate due to the financial scandals of recent years. However, it is currently seen as a key factor for the success of organizations. This is because of the strong evolution that it has undergone over the years and the increase in financial market demands. Corporate governance is also seen as a crucial component in strengthening investor confidence. According to the literature, good corporate governance allows for the achievement of a degree of trust necessary for the proper functioning of a market. Currently, good corporate governance practices contribute to attracting investors, increasing stakeholder confidence, raising a company's reputation, and increasing business transparency among other benefits. The present study aims to analyse corporate governance disclosure in companies listed on Euronext Lisbon in 2020. To achieve this aim, we perform a content analysis of the corporate governance and annual reports as well as the consolidated annual accounts of a sample comprising 32 companies listed on Euronext Lisbon as at 31st December 2020. To analyse the extent of disclosure, a disclosure index is created based on the recommendations of the Portuguese Securities Market Commission; this makes it possible to measure the degree of compliance with recommended disclosures. Only disclosures related to the board of directors, the audit committee, the external auditor, and the statutory auditor are considered. The average value of the disclosure index is 0.977, with the most disclosed information related to the statutory auditor and the least disclosed related to the audit committee. This study contributes to a good understanding of corporate governance in the Portuguese context.

Shedding light on the gender quota law debate: board members’ profiles before and after legally binding quotas in Portugal

PurposeThis study aims to provide a comparative portrait of the profile of men and women in the boardrooms of listed companies (Euronext Lisbon, Portugal) during the first stage of the gender quota law, by comparing the profile of those board members appointed before the mandated quota law and those appointed after it. This study also seeks to contribute to a critical review of the main reservations expressed by some core institutional actors, who initially voiced their concern that it might be difficult to find women in equal conditions to men in terms of their cumulative experience and qualifications to serve as board members.Design/methodology/approachIn addition to providing a comparative descriptive analysis of male and female board members’ profiles before and after the mandated gender quota law, an aggregate professional endowments measure (professional endowments Index) is also calculated.FindingsThe research findings show that, in the first stage of the quota law, men and women appointed as board members after the mandated gender quota law are fundamentally similar in their professional attributes, forming a more homogeneous boardroom than those holding board positions before it.Originality/valueThis study contributes to the literature on the profile of the men and women serving on the publicly listed company boards in Portugal, by comparing their profiles before and after the mandated gender quota law. This study also fills a gap in the literature, as studies about gender quotas and corporate boards relating to Portugal and Southern European countries in general are still relatively scant. To the best of the authors’ knowledge, this is the first study carried out into the gender quota law on corporate boards in Portugal.

Management or market variables in the assessment of corporate performance? Evidence on a bank-based system

PurposeThis paper aims to study the influence of some company-specific characteristics, corporate governance factors and macroeconomic factors on the Portuguese companies’ performance.Design/methodology/approachTo achieve this aim, the authors have used data from 39 Euronext Lisbon companies for the period between 2014 and 2019. The authors used panel data methodology, specifically the generalized method of moments estimation method by Arellano and Bover (1995) and Blundell and Bond (1998).FindingsThe results point out that the sign and significance of the determinants of corporate performance change depending on the variable used to measure performance. The Tobin’s Q variable, as a market variable and variable of interest to potential investors, is explained by some corporate governance variables and company-specific factors. Specifically, potential investors are confident in the leadership power of the chief executive office (CEO) and the members of the Board of Directors, which contributes positively to corporate performance. However, the firms’ age has a negative impact on Tobin’s Q. Considering an accounting variable managed internally by the organizations, the results show that return on assets is negatively influenced by leverage, and positively affected by CEO duality, which the manager believes is decisive to maintain performance levels.Originality/valueTo the best of the authors’ knowledge, this study is the first to analyze specific characteristics of companies and corporate governance factors, in a specific macroeconomic environment of high dependence on banking, considering the nonlinear effect of company age on company performance.

The Influence of the Board of Directors and the Auditor in the Disclosure of Derivative Financial Instruments: Evidence on Portuguese Capital Market

Purpose: This article aims to analyze the influence of certain characteristics of the board of directors and the auditor on the disclosure of derivative financial instruments. Theoretical framework: Operations with derivative instruments are associated with high risks, so the disclosure of these operations and their results helps to reduce information asymmetries. On the other hand, acccording to agency theory, the characteristics of the board of directors and of the auditor can affect the quality and the level of financial information disclosed. Design/methodology/approach: The data were obtained through content analysis, considering the 2017 reports and accounts of 37 companies listed on Euronext Lisbon, through a disclosure index. Subsequently, a multiple linear regression model was developed to identify the determinants of the level of disclosure about derivative instruments. Findings: The results revealed that only the number of independent members on the board of directors, the auditor's gender, and the size of the entity influence the level of disclosure about derivative instruments. Research, Practical & Social implications: This study may be useful for regulators in setting disclosure requirements for derivative instruments and useful in companies' decision making in defining the members of the board and the auditor. Originality/value: It contributes to the literature on compliance with IFRS and contributes to the perception of the influence of certain characteristics associated with the board of directors and the auditor in the disclosure of derivative instruments.

The Relationship between the Company’s Value and the Tone of the Risk-Related Narratives: The Case of Portugal

The present study aims to identify the impact of the tone of risk reporting narratives on company market value. The paper uses a sample of 34 Portuguese non-finance companies with shares traded at the Euronext Lisbon stock exchange market. The paper conducts an automated content analysis of the risk reporting narratives included in the risk and risk management sections of the annual reports for 2018 by using the software DICTION 7 (Digitext, Inc., Austin, TX, USA) to retrieve the speech tone. Main findings indicate that the tone category “activity” is associated negatively with the company’s market value. This result shows that investors misprice risk information that incorporates traces of overconfidence, narcissistic self-confidence and heroic leadership. The present study extends prior literature by analyzing the economic incentives of the tone of risk reporting narratives, not yet studied. Findings are both relevant to investors to support their decision-making processes and managers to strategically manage their risk communication tactics and benefit from the advantages emanated from them. Limitations related to the research setting do not undermine the generalization of findings because the automated algorithm provided by DICTION assures the content analysis’s reliability. The sample used corresponds to the population of the Portuguese non-finance listed companies.

Operating Risk (Cost-Volume-Profit) and Economic Value Added (EVA®)

Today, it is unquestionable the importance that organizational management is supported by indicators. Also, knowledge of value creation and operating risk are information that differentiates this management support. This study aimed to verify the relationship between the value creation generated by companies included in the sample and the indicators used in operating risk (cost-volume-profit analysis). In the literature review the concept of value creation and the indicators usually used to measure operating risk, break-even point, margin of safety, and degree of operating leverage, were presented and characterized, as well as the Economic Value Added (EVA®), which was the value-based performance measure used in the study. The sample consists of 27 non-financial companies listed in Euronext Lisbon and the period analyzed was the one between 2014 and 2018. The data were obtained through the consolidated annual accounts of the sample companies, and its analysis was performed using the multivariate statistical analysis technique, linear regression. The results showed that the estimated multiple linear regression model allowed, with a very reasonable quality, to estimate the impact that the break-even point and the margin of safety variables have on the variation of the value of EVA®. This study gives significant information showing how operating risk indicators affect value creation, which is considered one the main objectives of companies.

Value Creation: EVA® Value Drivers - The Case of Euronext Lisbon

Value-based management has gained prominence in both business and academia, supported by the notion that It is no longer sufficient for a company to generate profit, it is also required that the profit be higher than the cost of the total capital invested in the company. To increase value creation, managers need to understand which are its relevant determinants (value drivers). Therefore, this study aims to identify the main value creation drivers measured by EVA® (economic value added), one of the value-based performance measures more referenced in financial literature. A sample of non-financial listed companies on Euronext Lisbon, from 2011 till 2016, is analyzed. The data was collected from the companies’ annual consolidated financial reports. The data was analyzed using tree statistical analysis techniques, binary logistic regression, Pearson correlation coefficient, and t-test for independent groups, with SPSS (Statistical package for social sciences). The results show that the variables more relevant to value creation are the operating profit margin ratio, invested capital turnover, and the cost of equity rate. This study provides valuable information that assists managers in their decision-making, allowing to maximize value creation, through the identification of the main value drivers, and it also contributes to the dissemination on the subject of value creation.

Financial Instruments’ Disclosure in Compliance with IFRS 7: The Portuguese Companies

The constant changes in the business context and international relations have led companies to be provided with financial reporting with useful information, including their relevance, comparability and harmonization as required by International Financial Reporting Standards (IFRS). This study analyzes the level of disclosure of derivative financial instruments from companies in the PSI20 stock index, in the Euronext Lisbon stock exchange, according to requirements of IRFS 7. A disclosure index was created, based on the reports and accounts of companies in the period 2015-2017. To analyze the evolution of the disclosure level according to companies’ characteristics (dimension, profitability, share price and auditor type), we applied a cluster analysis. The results show a high level of disclosure. This evidence may be related to the mandatory adoption of IAS / IFRS and may also reflect companies' greater concern in disclosing this type of information due to the negative impact that the global financial crisis has had on corporate performance in general. The dimension is the variable that affects disclosure. That is, there is a tendency to, the higher the company the higher the level of disclosure. However, the results show that smaller companies also have high levels of disclosure. This may be associated with greater or lesser quantity or value of derivative financial instruments used.

HOW DO DIFFERENT FIRMS PERFORM WHILE TRADING OWN STOCK? A GRANULAR ANALYSIS ON SPECIFIC CHARACTERISTICS AND MARKET CONDITIONS

Which firms are more likely to time the market? This paper uses a relative transaction price approach, focusing on 37997 own stock transactions from Euronext Lisbon listed firms, ranging from 2005 to 2015, to estimate the relationship between the market timing ability of firms and a set of firm specific characteristics. Results show that smaller, more efficient but less valuable companies are more likely to be successful to time the market. Furthermore, we show that a shifting event such as a country bailout can lead to an increased performance from firms when trading own stock. Additionally, we find proof that OTC trading can be linked to lower market timing capabilities. At last, and due to the considerable weight of the financial sector within our sample, we estimated isolated results, which prove that the higher the relative performance of a firm when compared to its share value, the higher the capabilities of a financial sector firm to time the market when repurchasing own stock.

Timing the market with own stock: an extensive analysis with buying and selling evidence

PurposeAre firms able to time the market? The purpose of this paper is to focus on the study of own stock trading, emphasizing both repurchase and resell operations on the open market as well as over the counter.Design/methodology/approachThe authors use data on 37,997 own stock transactions from 2005 to 2015 of Euronext Lisbon listed firms. Following Dittmar and Field (2015), this paper uses relative transaction prices to ascertain the relative performance of own stock transactions, in the open market and over the counter.FindingsResults show that firms can time both repurchases as well as resales. Firms repurchase (resell) at lower (higher) prices than those prevailing in the market. Moreover, market-timing ability proves to be higher after the bailout period and to be influenced by the own stock trading frequency. Trading on the open market allows for increased timing ability for own stock repurchasing and reselling activity. Finally, results show seasonal effects both in repurchase and resale performance. Also, more efficient but less valuable firms are more likely to be successful in timing the market.Originality/valueThe authors study both the repurchasing and the reselling activity of the same set of firms, of already issued stock, using high-frequency (daily) data. In addition, the authors study own stock trading both in the open market and OTC, and also study the impact of a major economic shift on the firms’ ability to time the market.

Determinants of Portuguese firms’ financial performance: panel data evidence

PurposeThe purpose of this paper is to analyse the determinants of Portuguese firms’ performance.Design/methodology/approachTo achieve this aim, the authors used data from 37 non-financial firms in the period between 2010 and 2015. Three dependent variables were tested and the estimation of the model using the Generalised Method of Moments shows that internal, external and institutional factors are important to explain the performance of firms listed in Euronext Lisbon.FindingsThe determinants of firm performance vary depending on the variable used to measure the performance. Specifically, the results show that when the authors use a market variable of performance, the firm-specific variables are not so important to explain performance. The macroeconomic factors, including the investor’s sentiment and insider ownership, more effectively explain the firm’s performance. The evidence suggests that the determinants of firm performance change according to the way in which different stakeholders appreciate firm performance.Originality/valueThe main contribution of such approach is to show that internal and external factors influence performance measures in distinct ways, thus helping managers who are expected to make decisions according to the investors’ expectations. It provides initial guidelines for policy makers to understand how to improve the performance of their firms using firm-specific factors. Additionally, this work also demonstrates that the firm’s characteristics, macroeconomics and governance factors could affect the Portuguese firms’ performance, conveying a valuable contribution for investors.

Evaluation of volatility models for forecasting Value-at-Risk and Expected Shortfall in the Portuguese stock market

We run a forecasting competition of different methodologies to estimate Value-at-Risk (VaR) and Expected Shortfall (ES) with data on several stocks traded in the Euronext Lisbon stock exchange. The results are gauged using several backtesting procedures and compared with several loss functions. The asymmetric GARCH class with Extreme Value Theory generally performed better both for VaR and ES forecasting, especially, for more conservative coverage levels. Skewed distributions do not perform better than their conventional counterparts. The recommended sample size depends if the focus is on VaR or magnitude of the losses, although we find some superiority of larger sample sizes.

The role of the external auditor in corporate governance: The case of companies listed in the NYSE Euronext Lisbon

This study investigates the effects of the presence of the external auditor on corporate governance in Portugal, in the way listed companies are managed, based on the verification of compliance with the corporate governance regulations of the Securities Market Commission, as well as the transparency of information and the reduction of agency problems, fraud and economic crimes. By comparing government reports of companies listed on NYSE Euronext Lisbon, during several periods and with surveys conducted in the 1st half of 2013 in Portugal to the external auditors responsible for the majority of the legal certification of accounts of companies during 2007 to 2011, a significant direct relationship in the fulfillment of the recommendations of corporate governance and its verification by the external auditor is concluded. Based on multiple regression and multinomial logistic models, it is concluded that a greater involvement of the ROC in complying with corporate governance recommendations, allows for greater transparency of information and a reduction of agency problems, fraud and economic crimes