Firm Fixed Effects Research Articles

The Impact of Carbon Awareness, Country-Governance, and Innovation on the Cost of Equity: Evidence from Oil and Gas Firms

The present paper explores the impact of carbon awareness on the cost of equity (COE) with a keen focus on the influence of country governance and innovation factors. Drawing on Bloomberg data spanning from 2011 to 2022, our analysis encompasses 263 firms within the Oil and Gas sector across 50 countries, culminating in 2,122 annual observations. Through the employment of a comprehensive suite of regression analyses—including median regression, M-estimator regression, and MM-estimator regression, alongside Firm-Fixed Effect and Reverse Causality Models—we uncover a consistently negative association between carbon awareness and COE. Our investigation further assesses the effect of country-level governance on COE, revealing a universally negative correlation. Among governance indicators, regulatory quality emerges as a particularly significant factor. Similarly, we observe a consistent negative relationship between country-level innovation and COE, reinforcing the significance of national innovation capabilities in financial performance metrics. These findings remain robust across a range of tests, underscoring their reliability and relevance. The study is important for policymakers, investors, managers, and strategic environmentalists.

Opportunity or opportunism? Blockchain technology adoption and corporate default risk

Blockchain technology plays a significant role in new technology infrastructure and has a significant influence on artificial intelligence, big data, and 5 G, and its application has been extended to the Internet of Things, digital asset transactions, digital finance, and so on. In financial systems, it could improve the efficiency of data processing, reduce errors, and detect fraud. However, blockchain adoption could increase the stock price and induce manipulation opportunisms. Managers could also use this advantage to mask their performance and increase corporate default risk. Using the data of Chinese listed companies from 2001 to 2021, we investigate whether blockchain technology adoption could increase or decrease corporate default risk. Using the expected default risk model to estimate the risk, the results show that the default risk increases once the firm adopts blockchain technology, which indicates managerial opportunism behavior. The effect works in firms with CEO duality and higher power consolidation. And similar results are also shown in the dual-duty companies. The results are also robust in instrumental variable tests, difference-in-difference tests (DIDs), firm-fixed effect, placebo tests, and other robustness tests.

Hedge fund activism and corporate litigation: an analysis of securities and non-securities lawsuits

PurposeThis study examines how corporate litigation, both securities-related and not, is affected by hedge fund (HF) activism.Design/methodology/approachWe use a difference-in-differences (DiD) method, along with propensity score matching and firm fixed effects and a comparison of HF and non-HF activists for identification.FindingsWe find that companies that are targeted by HFs face operation-related lawsuits, mainly from stakeholders or competitors. This effect does not seem to be caused by targets' higher tendency to settle the cases. Our evidence shows that HF activists increase firm value for the target firms that are prone to litigation.Originality/valueTherefore, our evidence supports the idea that the higher operation litigation risks are unintended consequences of improving firm efficiency through cost savings or restructuring of target firms by the activists.

Board gender equality and ESG performance. Evidence from European banking sector

PurposeThe purpose of this paper is to investigate the relationship between board gender equality and environmental, social and governance (ESG) performance in the European banking sector. The study examines whether and how the presence of women on the board of directors (BoD) influences ESG dimensions.Design/methodology/approachThe authors analyzed a sample of 72 European Union banks for the period 2015–2021 and developed an econometric model applying unbalanced panel data regression with firm fixed effects and controls per year. To test the research hypotheses, the authors considered gender equality in terms of female participation on the BoD and measured ESG dimensions by using the ESG score provided by Refinitiv.FindingsThe findings suggest a significant positive relationship between the number of women on BoD and the ESG performance of European banks only up to a certain threshold of female directors (at least three women). The study also explores how the proportion of women on BoD influences the individual ESG pillars. The results show that the percentage of female directors has a positive and statistically significant impact on the social dimension of the ESG framework.Research limitations/implicationsThe investigation is highly relevant to investors considering ESG issues in their decision-making process. The overall findings support policymakers and regulators on how to improve ESG performance through the design and the application of corporate governance (CG) mechanisms. From a managerial perspective, the study suggests that managers and CEOs should focus their efforts on establishing the right gender combination of directors on bank BoDs.Originality/valueThis paper offers an in-depth examination of the CG practices of banks, and it attempts to bridge the gap in prior literature on the determinants of ESG issues in the European banking industry. To the best of the authors’ knowledge, this study is the first that investigates the relationship between the representation of women on BoDs and the ESG dimensions measured by the Refinitiv Eikon score. The use of critical mass theory adds a fresh perspective to the literature on ESG in Europe since the influence of board gender diversity on ESG performance of the European banks is still unaccounted for. This study addresses this pressing research issue drawing on resource dependence, agency and legitimacy theories.

The parental pay gap over the life cycle: Children, jobs, and labor supply

Women earn less than men, and that is especially true of mothers relative to fathers. Much of the widening occurs after family formation when mothers reduce their hours of work. But what happens when the kids grow up? To answer that question, we estimate three earning gaps: the “motherhood penalty,” the “price of being female,” and the “fatherhood premium.” When added together these three produce the “parental gender gap,” defined as the difference in earnings between mothers and fathers. We estimate (log) earnings gaps for college graduates born around 1960 using longitudinal data from the NLSY79 and from the LEHD-Census that track respondents from their twenties to their fifties. As the children grow up and as women work more hours, the motherhood penalty is greatly reduced. But women, especially mothers, seem willing throughout their working lives to trade lower pay for various amenities, such as working in firms with management practices that are less penalizing of career interruptions or of shorter work schedules. Fathers, however, manage to expand their relative earnings gains as their children age, particularly among those working in time-intensive jobs, irrespective of work hours or firm fixed effects. The parental gender gap in earnings remains substantial over the family lifecycle.

Organizational capital and stock performance during Crises: Moderating role of generalist CEO

This study examines the relationship between organizational capital (OC) and stock performance during the two recent crisis periods, namely the GFC and COVID-19. Economic crises highlight the sustainable competitiveness of firms, providing an opportunity to identify the role of OC. OC is intangible capital that encompasses intrinsic business processes and expertise, facilitating more efficient resource utilization than competitors. Results show that a greater OC is significantly associated with higher stock returns during both crisis periods. The association is robust to the models with firm-fixed effects and instrumental variables. In addition, we find evidence that generalist CEOs strengthen this relationship while specialist CEOs do not. This study emphasizes the pivotal role of OC as a protective buffer against external shocks, particularly during periods when the market pays more attention to corporate sustainability.

Corporate culture's influence on the transparency of financial reporting in Iran: an in-depth analysis of readability and tone

PurposeThis study investigates the influence of corporate culture on financial reporting transparency within Iranian firms.Design/methodology/approachLeveraging a dataset of 1,480 firm-year observations from the Tehran Stock Exchange spanning from 2013 to 2022, the study employs text mining to quantify linguistic features of corporate culture and transparency, specifically readability and tone, within annual financial statements and Management Discussion and Analysis (MD&A) reports.FindingsOur results confirm a positive and significant relationship between corporate culture and financial reporting transparency. The distinct dimensions of corporate culture — Creativity, Competition, Control, and Collaboration — each uniquely enhance financial transparency. Robustness tests including firm fixed-effects, entropy balancing, Generalized Method of Moments (GMM), and Propensity Score Matching (PSM) validate the profound influence of corporate culture on transparency. Additionally, our analysis shows that corporate culture significantly affects the disclosure of business, operational, and financial risks, with varying impacts across risk categories. Cross-sectional analysis further reveals how the impact of corporate culture on transparency varies significantly across different industries and firm sizes.Research limitations/implicationsThe study’s scope, while focused on Iran, opens avenues for comparative research in different cultural and regulatory environments. Its reliance on text mining could be complemented by qualitative methods to capture more nuanced linguistic subtleties.Practical implicationsFindings underscore the strategic importance of cultivating a transparent corporate culture for enhancing financial reporting practices and stakeholder trust, particularly in emerging economies with similar dynamics to Iran.Originality/valueThis research is pioneering in its quantitative analysis of the textual features of corporate culture and its impact on transparency within Iranian corporate reports, integrating foundational theoretical perspectives with empirical evidence.

Green innovation and corporate default risk

We investigate the impact of green innovation on default risk for the period 2003–2020. Using 15,015 firm-year observations from 2301 unique U.S. firms and a firm-fixed effects regression model, we find that firms with higher green-innovation experience lower default risk as measured by the distance-to-default, probability of default, and CDS spreads. We find robust evidence addressing potential endogeneity in the association between green innovation and default risk by applying three different approaches: the propensity score matching approach, the instrumental variable approach, and the difference-in-differences technique. Our channel analysis results show that high green innovation reduces cashflow volatility and managerial risk-taking, which translates into lower default risk. The influence of green innovation on default risks is contingent on various firm characteristics. It is more pronounced in firms with greater institutional ownership, a younger age, and more carbon-intensive operations.

Related-party transactions and CEO foreign experience: Evidence from China

Chinese CEOs with foreign experience tend to engage less in related-party transactions (RPTs). This result holds across various analyses, including firm-fixed effects model estimations, matching on firm and CEO characteristics, additional controls, and instrumental variable regressions. The effect of CEO foreign experience is pronounced for non-state-controlled and non–politically connected firms. The effect is weaker for firms with independent boards and foreign shareholders. Moreover, CEOs exposed to more developed institutional environments tend to reduce RPTs more. Collectively, our findings indicate that CEO foreign experience can enhance corporate governance in emerging markets.

The effect of the Tax Cuts and Jobs Act of 2017 on corporate investment

This study examines the impact of the Tax Cuts and Jobs Act of 2017 (TCJA) on U.S. corporate investment. We examine U.S. firms and compare them to Canadian firms from 2010 to 2019 in a multivariate firm fixed-effects difference-in-differences analysis. Our results indicate that investment increases for U.S. firms relative to Canadian firms after the tax cuts. We also find that capital intensive and financially constrained firms increase investment the most. We explore how the TCJA impacted firm payouts and find some evidence that the tax cuts are associated with increased dividends. The paper contributes to the literature by providing evidence on the effects of the TCJA on corporate investment which have been debated extensively by politicians, journalists, tax policy experts, and academics.

ESG performance, heterogeneous creditors, and bond financing costs: Firm-level evidence

Exploiting credit spread to measure firm bond financing costs, this study explored the impact of environmental, social, and governance (ESG) performance on bond financing costs from the perspective of heterogeneous creditors. Our results revealed that national interbank bond market and qualified institutional investors are increasingly interested in aligning their capital with ESG-related investment opportunities. Thus, they require a low rate of return from firms with good ESG performance. In contrast, domestic legal and natural persons and ordinary institutional investors are unlikely to accept a low investment return in exchange for the positive impact of ESG. Additional robustness tests confirmed the results, including firm-fixed effects, variable substitution method, supplemental variable method, lagged variable approach, instrumental variable analysis, and propensity score matching. The results of mechanism analysis indicated that the bond cost reduction effect of ESG is achieved by improving firms’ information disclosure quality and reputation. In addition, because of trade-off theory and agency problems, the environmental and social factors of ESG have only a limited impact on bond cost reduction, whereas the governance factor markedly reduces bond costs.

Women on Board and ESG Performance: Insights from the Italian Utilities Sector

The purpose of this paper is to investigate the relationship between gender diversity and environmental, social and governance (ESG) performance in the Italian utilities sector. The study examines whether the presence of women on the board of directors (BoD) is related to ESG dimensions. We analyzed a sample of 482 utility companies for the period 2018-2022 and we developed an econometric model applying unbalanced panel regression data with firm fixed effects and controls per year. Within a multivariate regression model, the authors considered the ESG score provided by Refinitiv Eikon to test the research hypotheses. Findings show that the presence of women on board of directors improves ESG performance when a critical mass of female board members (at least three) is reached. A critical threshold of female directors also positively influences the scoring of environmental and social pillars. From a managerial perspective this study draws attention to BoD composition encouraging utility companies to define internal corporate governance mechanisms thoroughly. The overall findings support managers, policy makers and regulators on how to improve ESG performance through gender diversity on BoD. This paper offers an in-depth examination of the ESG practices of utility firms, and it attempts to bridge the gap in prior literature on the determinants of ESG performance in the Italian utilities sector. This study is the first that investigates the relationship between board gender diversity and ESG performance in such a context exploring how a critical mass of women on BoD affects ESG dimensions.

Standing on the shoulders of science

AbstractResearch SummaryToday's innovations rely on scientific discoveries of the past, yet only some corporate R&D builds directly on scientific output. In this article, we analyze U.S. patents to investigate how firms generate value by building on prior art “closer” to science. We show that patent value is decreasing in distance‐to‐science. Overall, we find a science premium within firms ranging from 5.0 to 18.3%. If we allow for firm sorting into different modes of R&D based on their relative advantage, that is, when we do not control for firm fixed effects, we find an even larger science premium: patents building directly on scientific publications are 4.0–42.3% more valuable than patents in the same technology that are not directly based on science.Managerial SummaryBuilding on scientific research allows firms to capture significantly more value from their inventions. By analyzing U.S. patents and their linkages to scientific publications, our paper describes the relationship between invention “proximity” to the scientific literature and public firm valuations—as measured in abnormal stock market returns. Our findings indicate that patents building on science are 5.0–18.3% more valuable. If we account for variations in R&D strategies among firms, the premium becomes even larger, ranging from 4.0 to 42.3%. Further, the results show that the value‐enhancing benefits of integrating scientific insights into R&D are greater for firms with more experience building on science. Together, the results underscore the competitive advantages of using science as a foundation for corporate innovation.

Exacerbate or alleviate? Impact of controlling shareholders' share pledging on over-investment

This paper investigates the relationship between controlling shareholders' share pledging and firm level over-investment. Utilizing Chinese A-share market data spanning 2007–2020, we find that firms with share pledging by controlling shareholders are more prone to over-invest, and the over-investment degree becomes severer as the pledging percentage increases. In addition, we observe this effect more pronounced in firms characterized by more concentrated ownership structure. Our findings still hold after the endogeneity disposal with a firm-fixed effect regression, Heckman two-stage regression with instrumental variables, the propensity score matching (PSM) and differences-in-differences (DID) approach. Furthermore, we observe that firms with controlling shareholders' share pledging tend to be concerned more with additional investments while neglecting maintenance investments and R&D investments. Combined with the motivation of controlling shareholders to gain substitute cash flow rights and convey good signals to the market, as well as the feasibility by using their dominate voting rights and pledged funds, it properly illustrates the mechanism through which controlling shareholders' share pledging impact over-investment, which meanwhile aggravates the principal-principal (PP) conflicts between controlling shareholders and minority shareholders. Consequently, our findings empirically demonstrate that signaling costs in signaling theory could be explicit conflicts in the agency theory, adding new empirical evidence for the relationship between signaling theory and agency theory.

ESG performance and corporate fraudulence: Evidence from China

By adopting a large sample of Chinese public listed firms from 2014 to 2021, we examine whether firms' ESG performance inhibits corporate fraud. Using panel data regression techniques, we find that high ESG performance mitigates corporate fraudulence. After conducting a series of robustness tests, including propensity score matching (PSM) model, Heckman two-step sample selection model, instrumental variable (IV) and 2SLS regression model, and firm fixed effect model, the results remain unchanged. Further analyses suggest that this negative relationship is more pronounced in non-state-owned enterprise (non-SOE) firms and firms that voluntarily disclose ESG information. The mechanism analysis suggests that high-quality ESG engagement improves firms' governance performance and inhibits managerial myopia, which thereby mitigates corporate fraud. Overall, our findings provide incremental evidence on the role of ESG in filling institutional voids in emerging economies. Our findings also provide significant policy implications to regulators and policy makers who seek to promote fair information disclosure and mitigate corporate fraud risk.

Independent directors’ status and R&D: a study based on Chinese cultural background

PurposeIndependent directors are important corporate decision participants and makers. Based on the Chinese cultural background, this paper interprets the listing order of independent directors as independent directors’ status, exploring their influence on the corporate research and development (R&D) behavior.Design/methodology/approachThis paper studies A-share listed firms in China from 2008 to 2018 as the sample. The main method is ordinary least square (OLS) regression. We also use other methods to deal with endogenous problems, such as the firm fixed effect method, change model method, two-stage instrumental variable method, and Heckman two-stage method.Findings(1) Higher independent directors’ status attribute to more effective exertion of supervision and consultation function, and positively enhance the corporate R&D investment. The increase of the independent director’ status by one standard deviation will increase the R&D investment by 4.6%. (2) The above effect is more influential in firms with stronger traditional culture atmosphere, higher information opacity and higher performance volatility. (3) High-status independent directors promote R&D investment by improving the scientificity of R&D evaluation and reducing information asymmetry. (4) The enhancing effect of independent director’ status on R&D investment is positively associated with the firm’s patent output and market value.Originality/valueThis paper contributes to understanding the relationship between the independent directors’ status and their duty execution from an embedded cultural background perspective. The findings of the study enlighten the improvement of corporate governance efficiency and the healthy development of the capital market.

Does economic and policy uncertainty impact corporate policies? Evidence from India

PurposeThis study aims to examine the role of economic political uncertainty (EPU) on various corporate policies, namely, cash reserves, investment, capital structure and operating activities of Indian listed firms.Design/methodology/approachTo assess the influence of policy-related uncertainties, the author uses the India-specific EPU news-based index constructed by Baker et al. (2016) as a proxy for policy uncertainties. This study uses data from listed Indian firms spanning the period 2003 to 2019. The author uses panel regression models with firm-fixed effects to analyze the impact of EPU on corporate policies, including cash reserves, leverage and CAPEX, while considering key control variables.FindingsIn response to heightened EPU, firms tend to increase their cash reserves, curtail their investment activities and favour secured financing options. Notably, this study aligns with the “real options” framework, demonstrating that firms with substantial investment irreversibility significantly reduce their capital expenditures during periods of elevated EPU. Additionally, the results reveal that rising EPU corresponds to heightened borrowing costs and increased operating expenses for firms.Originality/valueIn contrast to prior research that predominantly investigated the impact of EPU on the decisions of listed firms in developed markets, this study delves into the role of EPU on corporate policies among listed firms in India. This focus is particularly relevant, given the significant policy changes that have transpired in the Indian business landscape in recent years.

Firm-level political risk and equity issuance

We examine whether firm-level political risk influences the issuance of equity (debt) to finance corporate investment. With a sample of 64,693 firm-quarter observations from 2002 to 2020, we find that firm-level political risk is significantly and positively associated with subsequent equity issuance as opposed to debt issuance. To mitigate endogeneity, we estimate firm fixed-effects regression, perform nearest-neighbor score matching technique and Heckman’s (1979) two-step correction procedure, and employ gubernatorial elections in different states of the U.S. as a shock to the firm-level political risk. We also test for two potential economic mechanisms, financial flexibility and information asymmetry, and find that our baseline results are more pronounced for these channels. Our study presents new evidence on firms’ financing choices in the presence of firm-level political risk.

The influence of board interlocks and sustainability experience on transparent sustainability disclosure

AbstractWe investigate board interlocks and their relationship to the transparency of sustainability disclosure, drawing on the theoretical perspectives of resource dependence theory and agency theory. We ascertain that board members who gain sustainability experience by serving on another board will influence the transparency of sustainability disclosure for the focal firm. The study analyzes data from S&P 1500 firms in the U.S. from 2009 to 2018, using ordinary least squares regressions. Our findings demonstrate that the focal firms' sustainability disclosure will be more transparent if their boards have interlocking directors with experience gained from other boards in current or prior years. Furthermore, we find that the sustainability experience of interlocked firms interacts with both gender diversity and board independence, leading to an enhancement in the transparency of sustainability disclosure. In addition, we conduct robustness tests such as performing propensity score matching, controlling for firm fixed effects, and applying entropy matching. These additional tests provide consistent results to confirm and strengthen our findings.

Does the resignation of an independent director affect audit fees? An empirical study based on Chinese A-share listed companies

Based on the data of Chinese A-share listed companies from 2006 to 2020, the article empirically examines the impact of independent directors quitting on audit fees when it occurs in listed companies, using independent directors quitting as an entry point. The empirical results show a significant positive relationship between independent directors quitting and audit fees and the positive effect still holds after controlling for firm fixed effects, instrumental variable method, and variable substitution test. The above effect is the early resignation of independent directors, more significant in listed companies of a nonstate nature, employing nonBig Four accounting firms, and firms where the positions of chairperson and general manager are separated. Furthermore, this study provides empirical evidence for the study of the effect between independent directors' quit and audit fees. The results also have some reference value for listed companies to improve the information disclosure level and how auditors make reasonable pricing.