Firm-level Characteristics Research Articles

Time-varying risk, mispricing attributes, and the accrual premium

We examine the mispricing attributes of the accrual effect in the presence of time-varying common risk factors, which are not independent of aggregate economic conditions. We find that the persistence of unconditional abnormal returns for accrual-based portfolios is not independent of firm-level characteristics such as size and book-to-market ratio (BE/ME). However, after adjusting for time-varying risk measures, the premiums associated with accruals and firm fundamentals are distinct from one another. The empirical evidence shows that a long-short hedge portfolio based on accruals and BE/ME generates significant abnormal returns even in the presence of time-varying risk. Taken together, our time-series and cross-sectional evidence strengthens the assertion that the well-known accrual effect is significantly associated with high-BE/ME value firms that tend to be low-investment firms. The fact that time-varying risk adds to the description of average returns of accrual-sorted portfolios and corroborates the presence of the accrual premium contributes significantly to the literature.

Institutional complexity and the strategic behaviors of SMEs in transitional environments

PurposeThe purpose of this paper is to contribute to the literature on institutional complexity by highlighting patterns of strategic behaviors of SMEs in institutional environments undergoing large scale transitions.Design/methodology/approachThe paper uses five in-depth case studies of medium-sized enterprises in the Yangtze River Delta region to study their behaviors over the 2000-2012 period during which the institutional landscape in China underwent major changes.FindingsThe authors find that when institutional complexity is high, i.e., when neither the planned economy nor the market economy logic dominates, the role of organizational filters is more pronounced. In this situation, firm-level characteristics – its revenues and profitability, its competitive position and future prospects – play a dominant role in determining the nature of the strategic decisions and actions the firm undertakes.Research limitations/implicationsThe findings provide a nuanced perspective on strategic behaviors under institutional complexity. The qualitative research design offers rich insights but limited generalizability.Practical implicationsThe findings offer practical insights to SME leaders in terms of exercising caution in undertaking unrelated diversification during periods of transition from planned to market economies.Originality/valueThe authors apply the concepts of institutional complexity and organizational filters in a context of large scale institutional transitions to study the strategic behaviors of SMEs over a 12 year period.

Private Equity Targets and Post Investment Performance: A Study of the Corporate Sector in the North and Regions

This report contributes to policy efforts to transform Northern growth, rebalance the UK economy and establish the North as a global powerhouse. • We utilise a unique corporate level database covering the period 1998-present to analyse the characteristics of the corporate sector in the North of England with a view to identifying the size and nature of the potential target market for growth finance through mid-market private equity (PE) investments. For this purpose we focus on companies within the size band of £5-£15m in assets and/or turnovers in the £5m plus range across all industry sectors. • For purposes of this report, the North is defined as comprising the North East, North West, Yorkshire and Humberside, East and West Midlands government standard regions. The North consistently has around a third (32.5%) of the total number of active companies throughout the whole period 1998-2013. • Recent analysis by the Centre for Management Buyout Research (Imperial College Business School) shows an increase in the number of private equity backed buyout deals in the period since 2012 with the Northern regions showing most activity outside London and the South East. We estimate that the Northern regions have 44% of the stock of PE invested firms in 2013. In 2015 81 deals worth £5.5bn were completed in the Northern regions representing 38.0% by number of deals and 27.1% by value of total private equity portfolio investment last year. • Our data set is utilised to profile the characteristics of private equity targets and identify potential targets in the Northern regions. The profiling of private equity targets, using a multivariate technique that assesses all firm level characteristics simultaneously, generates a range of significant characteristics. Private equity targets tend to be established companies in terms of age and size and are more likely to have a higher proportion of tangible assets. The targets are in stable industry sectors with a lower than average failure rate and are less likely to be diversified (single product). Amongst the riskier sectors private equity investors have a preference for advanced manufacturing technologies and the high technology end of the services sector. The firms that private equity investors target are generally cash generative, profitable and have high interest coverage ratios on existing debt. The target firms are likely to have borrowed and have charges on assets. These firms have lower levels of equity and lower than average productivity thus providing opportunities for investors to realise performance improvement, and growth, post investment. • The model identifies a total of around 1187 potential prime private equity targets in the Northern Regions that represents 36% of the total identified targets.• Depending on whether analyses include full accounts with or without the productivity determinant, or are based on the full sample estimation and the 2009-2013 sub-samples, we find that the number of medium sized PE targets in the Northern regions ranges from 689 to 293, and the number of large PE targets ranges from 1399 to 794.• We model firm level productivity using a multivariate technique that isolates the efficiency differences in firms attributed to technological progress, knowledge and know-how, management practices and other factors that increase efficiency (i.e. total factor productivity (TFP)). We find a positive productivity differential of PE backed firms over the control group of companies of around 5.1% throughout the whole period, which is stronger in the pre-recession period (around 6.4%). The differential is around 4.1% above the control sample, in the recession and post-recession period. The models are re-estimated on the subsample of firms in the northern regions and reveal a stronger relative performance of private equity portfolio companies relative to the control sample (7.5% to 9.1%) with a particularly strong performance in the more recent period. • We find a positive profitability differential for PE over other company types of between 2.0% and 3.5%. The differential is higher in the recession period and strongly significant. The results hold for the models estimated using the northern region subsample of firms only.• We find a rolling three-year compound annual growth rate (CAGR) in employment of around 3%, showing that achieved productivity improvements are not at the expense of employment. Private equity portfolio companies appear to be particularly resilient in the recession period. We find no significant differences of growth rates for firms in the Northern region compared to the PE invested population.

Exporters, Importers and Employment: Firm-Level Evidence from Africa

This article studies the relationship between firms’ export and import status and the quantity and types of employment they offer, using firm-level data from 47 African countries for the period 2006–14. The article also analyses how the quality of policies at the country-level can relate to the difference between exporters and non-exporters, and importers and non-importers. This article shows that both exporters and importers employ, on average, more full-time permanent workers than their respective non-trading counterparts, even after controlling for a wide range of firm-level characteristics. This employment premium is larger in countries with better quality of infrastructure. In addition, importers employ higher shares of non-production workers compared to non-importers. In addition, both exporters and importers are characterised by higher shares of female employment than their non-trading counterparts. Successful gender policies are positively associated with the female employment premium of trading firms. This article also finds that there is a larger proportion of temporary workers amongst the exporters’ workforce compared to non-exporters, but a better developed rural sector reduces this difference in the use of temporary manpower. The results presented in this article suggest that the quality of policies impacts the extent to which trading firms are able to generate decent job opportunities in Africa.

Ownership control of foreign affiliates: A property rights theory perspective

This paper applies property rights theory to explain changes in foreign affiliates’ ownership. Post-entry ownership change is driven by both firm-level characteristics and by the differences in the institutional environments in host countries. We distinguish between financial market development and the level of corruption as two different institutional dimensions, such that changes along these dimensions impact upon ownership change in different ways. Furthermore, we argue that changes in ownership are affected by the foreign affiliate’s relatedness with its parent’s sector, as well as by the affiliate’s maturity. We use firm level data across 125 host countries to test our hypotheses.

The role of firm characteristics on the relationship between gender diversity and firm performance

Purpose– The purpose of this paper is to understand the effect of gender diversity on firm performance and evaluate how that relationship is influenced by some firm-specific factors for firms in an emerging market.Design/methodology/approach– The authors collected firm level financial data and firm level characteristics for the firms listed in BIST100 index of Borsa Istanbul for the period between 2002 and 2006. Due to endogeneity of gender diversity and firm performance, the authors utilize unbalanced panel data with 2SLS specification. To observe the sensitivity of results across measures of performance, three measures of performance, two accounting-based and one market-based, are utilized.Findings– Overall, the authors find some weak evidence that gender diversity impacts firm performance. In particular, the findings imply significant association between gender diversity and firm performance for firms that are targeting local markets, for firms in the financial sector and for firms that are family or block-owned. Moreover, findings are fragile with respect to the measures of diversity and performance selected.Originality/value– Although the relationship between gender diversity and firm performance are investigated several times in the past, there are not many studies that examines the role of firm-specific factors on that relationship. By revealing the factors that are important, this study provides an explanation why the existing literature leads to mixed results.

Maximizing the Benefits of Internationalization: The Moderating Role of Labour Flexibility

Using the large-scale Korean Workplace Panel Survey, this study examines the interplay between international diversification, labour flexibility, and workplace-level performance in the context of advanced emerging markets. Filling the gap in the literature on the international diversification-performance (IDP) relationship, which focuses primarily on firm-level characteristics and overlooks the role of labour factors as contingent variables, we draw attention to the workplace level dynamics by exploring how the two types of labour flexibility—functional and numerical flexibility—moderate the impact of international diversification on performance. The results show that when workplaces invest in training for job enlargement and employee involvement programs that lead to the enhancement of functional flexibility, the link between international diversification and performance can be strengthened. This finding supports the assertion in the international HRM literature that, in the ever-globalized business environment, investment in human capital is a better strategy for improving financial performance in the long run. Furthermore, we find that numerical flexibility, as measured by in-house subcontracting arrangements, has a negative impact on the IDP relationship. Overall, our study suggests that the quality of human resources and a well-designed workplace configuration may still help improve performance in the context of international diversification, whereas excessive dependence on employment externalization for cost reduction is likely to hurt not only financial performance but also long-term sustainability. We also believe that our findings on the advanced emerging market economy complement insights from previous studies, which are largely based on Western developed economies, thus enriching current theories on labour flexibility.

The determinants of firm–bank relationships in Italy: bank ownership type, diversification and multiple banking relationships

This paper investigates the main features of the relationships between banks and non-financial firms in Italy. Based on detailed firm-level data, we analyse the role of firm-level characteristics, decision-making factors and local credit market indicators in shaping various aspects of corporate banking choices. Empirical results show that young and small firms have a higher probability of relationships with local banks, confirming the advantage of local credit institutions in dealing with informationally opaque firms. Large and internationally active firms tend to establish relationships with national and foreign banks, as they are able to provide more complex banking services that are crucial to access foreign markets. Moreover, firms that are more dependent on external financing are more likely to use multiple and differentiated banking relationships, as a way to diversify external financing sources and alleviate credit constraints.

Corporate governance, corporate health accounting, and firm value: The case of HIV/AIDS disclosures in Sub-Saharan Africa

Sub-Saharan Africa (SSA) has the highest prevalence rate of HIV/AIDS in the world, with negative effects on productivity, profitability, economic growth, and development. The social responsibility role of public companies in contributing towards reducing the negative effects of HIV/AIDS is priceless. This paper investigates the impact of corporate governance (CG) on social and environmental accounting (SEA) with specific focus on corporate health accounting (CHA) and, consequently, examines whether CG can moderate the link between CHA and firm value (FV), with particular focus on HIV/AIDS disclosures. First, employing one of the most extensive data on CG, CHA, and FV from a sample of listed SSA companies to date, our results suggest that companies that are better-governed tend to engage in increased CHA disclosures. Second, we find that the combined effects of CG and CHA on FV are stronger than CHA alone, meaning that the quality of firm-level CG moderates the link between CHA and FV. Our econometric specifications are robust to different traditional firm-level characteristics, endogeneities, and alternative CG (corporate board and shareholding structure variables), FV, and CHA proxies. We interpret our findings within a framework that attempts to combine Suchman's (1995) legitimacy theoretical perspective with Ashforth and Gibbs' (1990) substantive and symbolic legitimacy management strategies.

Do corporate policies follow a life-cycle?

We examine whether corporate investment, financing, and cash policies are interdependent and follow a predictable pattern in line with the firm life-cycle. We find that investments and equity issuance decrease with firm life-cycle, while debt issuance and cash holdings increase in the introduction and growth stages and decrease in the mature and shake-out/decline stages of the firm’s life-cycle. These results are robust after using various proxies for life-cycle and controlling for firm, CEO and board level characteristics. Collectively, our results show that corporate policies follow a firm life-cycle.

Do Corporate Policies Follow a Predictable Pattern? A Life-Cycle Explanation

We examine whether corporate investment, financing, and cash policies are interdependent and follow a predictable pattern in line with the firm life-cycle. We find that investments and equity issuance decrease with firm life-cycle, while debt issuance and cash holdings increase in the introduction and growth stages and decrease in the mature and shake-out/decline stages of the firm’s life-cycle. These results are robust after using various proxies for life-cycle and controlling for firm, CEO and board level characteristics. Collectively, our results show that corporate policies follow a firm life-cycle.

Regional Differences in the Determinants of Cash Holdings

This study investigates the existence of differences in the influence of firm characteristics on the level of cash across geographic regions. I tackle this question by undertaking a meta-regression analysis and find that geographic regions affect the association between firm characteristics and the level of cash. The influence of cash-determinants is similar in North America and Europe but different in Asia. The cause of this difference remains unclear. Results indicate that Asian firms are potentially affected by country-level agency concerns or a lack of financing alternatives. Regional differences persist after controlling for firm-level information asymmetries, country characteristics, and temporal trends.

Role of Country- and Firm-Level Determinants in Environmental, Social, and Governance Disclosure

In recent years, companies receive pressure to release environmental, social, and governance (ESG) disclosure, since these are perceived as critical issues by society. Despite this pressure, ESG disclosure practices considerably vary by firm. Prior academic literature investigated country- and firm-level factors determining such variation, alternatively adopting the institutional and legitimacy theory. By combining these theories in a unique framework, this study investigates the extent to which social structures (i.e., institutional theory) and social legitimization (i.e., legitimacy theory) influence ESG disclosure practices and each pillar. Results obtained using a cross-country sample of 14,174 firm-year observations during 2005–2012 provide evidence that country-level characteristics such as a political system (legal framework and corruption), labor system (labor protection and unemployment rate), and cultural system (Social Cohesion and Equal Opportunities) significantly affect firms’ ESG disclosure practices. However, their impact is heterogeneous in that they either reduce or enhance disclosure levels and may differ by pillar. Results for firm-level characteristics related to a firm’s visibility (analysts coverage, cross-listing, leverage, and size) demonstrate a positive and homogeneous effect on ESG disclosure and each pillar. These results inform policy makers and regulators aiming to enhance ESG disclosure levels of the risk they incur when managing variables related to social structure and the benefits of exposing firms to higher visibility.

The Role of Managerial Ability in Corporate Tax Avoidance

Most prior studies model tax avoidance as a function of firm-level characteristics and do not consider how individual executive characteristics affect tax avoidance. This paper investigates whether executives with superior ability to efficiently manage corporate resources engage in greater tax avoidance. Our results show that moving from the lower to upper quartile of managerial ability is associated with a 3.15% (2.50%) reduction in a firm’s one-year (five-year) cash effective tax rate. We examine how higher-ability managers reduce income tax payments and find that they engage in greater state tax planning activities, shift more income to foreign tax havens, make more research and development credit claims, and make greater investments in assets that generate accelerated depreciation deductions. Identifying a manager characteristic related to firms’ tax policy decisions adds to our understanding of the factors that explain the substantial variation in corporate income tax payments across firms. This paper was accepted by Mary Barth, accounting.

What firm characteristics determine women ' s employment in manufacturing? Evidence from Bangladesh

Purpose– The purpose of this paper is to investigate the principal determinants of women’s employment in the manufacturing sector of Bangladesh using a firm-level panel data from the World Bank’s “Enterprise Survey” for the years 2007, 2011 and 2013. The paper sheds light on the demand-side factors, mainly firm-level characteristics, which also influence this decision.Design/methodology/approach– The authors estimate a fractional logit model to model a dependent variable that is limited by zero from below and one from above.Findings– The results indicate that firm size, whether medium or large, and firms’ export-oriented activities, have an important impact on women’s employment in the manufacturing sector in Bangladesh. Moreover, the authors find that women are significantly more likely to work in unskilled-labour-intensive industries within the manufacturing sector.Research limitations/implications– The research is limited to Bangladesh; however, much of the evidence presented here has implications that are relevant to policymakers in other developing countries.Practical implications– The study identifies factors that affect female employment, that is, where the main constraints to increase female labour force participation. The study focuses on the demand-side factors, which has been somewhat neglected in recent years. As such, it has practical policy implications.Social implications– Focusing on female employment in Bangladesh also sheds light on the nexus between labour market opportunities and social change within a country that is characterised by extreme patriarchy, which has wide-reaching implications.Originality/value– This is an original and comprehensive paper by the authors.

Public news arrival and the idiosyncratic volatility puzzle

Abstract This paper analyzes the effects of news and its sentiment on the idiosyncratic volatility ( IVOL ) — expected return relation. We postulate that the perceived negative IVOL -expected return relation could be the artifact of the confounding effect of public news arrivals. Using the stock return data from the Center for Research in Security Prices (CRSP) database and the news database from the RavenPack News Analytics over the period from 2000 to 2011, we show that the strength of the positive relation is reduced systematically by 50% after accounting for the arrivals of good and bad news releases, which are defined by their sentiment scores. This finding is robust to numerous model specifications, and the inclusion of firm-level characteristics, liquidity risk and information risk. When we restrict the firm-specific news to value-relevant news, the positive relation disappears. We conclude that that the public arrivals of firm-specific news play a significant role in explaining the IVOL puzzle.

The Effects of Business Cycles on Firm Level Job Creation: Focusing on the Heterogeneous Effects by Firm Level Characteristics

The Effects of Business Cycles on Firm Level Job Creation: Focusing on the Heterogeneous Effects by Firm Level Characteristics

Examining the characteristics and managerial challenges of professional services: An empirical study of management consultancy in the travel, tourism, and hospitality sector

This paper finds that OM's ‘one-size-fits-all’ characterization of professional services, namely high levels of customer engagement, extensive customization, knowledge intensity, and low levels of capital intensity, does not hold when carrying out a ‘deep dive’ (to the best of our knowledge, a first in this area of OM) into consultancy in the US travel, tourism, and hospitality sector. We analyse mixed-method data (semi-structured interviews, focus groups, and a best–worst choice experimental survey) and observe that consultancy can actually be quite remote and passive and that any periods of face-to-face ‘engagement’ will typically be time limited and focused on specific project phases. Moreover, and further confirming the value of a study that allowed us to investigate professional service operations in a specific market context, our data suggest this may often be at the behest of the client. The significant variation observed in levels of customization we interpret as confirming Maister's (1993) notion of a portfolio of brains, grey hair, and procedural work. We also observed relatively high levels of capital intensity; reflecting perhaps the vintage of most OM characterizations and the dramatic ICT-related changes that have occurred in all business operations in the last 20 years. The work also demonstrates the necessity of a more contingent perspective on PSOM. We assess the impact of both firm (scale, specialization) and individual level (leverage) characteristics to demonstrate significant variation within what might be expected to be a relatively homogenous group of professional service operations. For example, investigating the effects of specialization (via a typology of consulting operations: super-specialists, generalists, deep knowledge traders, deep market knowledge traders) revealed that relative degree of interaction may be dependent upon degree of expertise, such that it was the super-specialists in our sample that spent less time with clients and the more generalist firms who were complementing their limited expert status with high levels of interaction (networking, etc.).

Firm-Level Hiring Difficulties: Persistence, Business Cycle And Local Labour Market Influences

We examine the correlates of reported hiring difficulties at the firm level using linked employer-employee and panel survey data over 2005-2011, focussing on the relative influence of firm-level characteristics, persistence, the business cycle and local labour market liquidity. At both the aggregate and the firm level, hiring difficulties eased after the onset of the Global Financial Crisis. Even in the presence of large cyclical changes in demand and labour market conditions, firm-level persistence is a dominant feature of the data, with one- and two-year lags of reported hiring difficulties both positively related to current difficulties. Firms paying higher wages are more likely to report difficulties when trying to hire skilled workers, while firms with more long tenure workers are less likely to report any difficulty hiring. Local labour market conditions appear unrelated to reported hiring difficulties.

Multilevel heterogeneity of R&D cooperation and innovation determinants

Assessing the impact of public support to innovation on R&D collaboration may require a more complex multilevel design, that describes the likely correlation present among firms characteristics within a particular sector. Using data from the 2006 edition of the Community Innovation Survey (CIS) for the Netherlands, we propose a methodology to study the effect of firm-level characteristics on the propensity to undertake a research collaborative agreement. In particular, we show that controlling for a richer variance structure yields a different picture with respect to simpler regression frameworks adopted in the literature of R&D cooperation determinants. Moreover, such a hierarchical framework can be generalized allowing for clustering at higher levels, such as sectors or geographical areas. Besides the link between public funding and R&D collaboration, our results confirm the findings of the literature: technological spillovers, risk and cost sharing rationales, firm’s size, and type of innovative activity are related to the decision of engaging in different sorts of research alliances.