Firm Market Research Articles

The impact of cultural distance on fund transfers in the internal capital market

This paper examines how cultural distance affects fund transfers in the internal capital market of multinational firms. The results show that a larger cultural distance significantly reduces internal fund transfers to foreign subsidiaries. These results are robust to alternative measures of cultural distance and different econometric specifications. External shocks do not affect the results. Further analysis shows that the negative cultural impact is driven mainly by the dimensions of power distance, individualism, and uncertainty avoidance. Furthermore, the effect of cultural distance on internal fund transfers is independent of subsidiary productivity, and a larger cultural distance exacerbates the negative impact of corporate diversification on firm value. Overall, our findings highlight the important role that culture plays in multinationals’ global operations.

Burn the Boats! Market Entry and Firm Boundary Decisions as Signals of Corporate Purpose Credibility

Burn the Boats! Market Entry and Firm Boundary Decisions as Signals of Corporate Purpose Credibility

Local CSR and Emerging Market Firms’ Upgrading: Evidence from China

Local CSR and Emerging Market Firms’ Upgrading: Evidence from China

EXPRESS: Untangling the Duality of Emerging Market Firms’ Response to OFDI Policies on Their Innovation Performance: A Resource Dependence Perspective

Firms’ international expansion, affected by outward foreign direct investment (OFDI) policies of home countries, can greatly shape their innovation performance. Yet, existing literature lacks sufficient investigation toward the nexus between corporate response to policies in OFDI activities and subsequent innovation performance. Thus, the authors designed this study to examine how a firm’s response to OFDI policies affects its innovation performance. Drawing upon the resource dependence theory, the authors theorize corporate response to OFDI policies as firm dependence on home government. By arguing that such dependence differentially affects firm innovation through support and control mechanisms, they elucidate the inverted U-shaped relationship between corporate response to OFDI policies (measured by the percentage of a firm’s OFDI projects in policy-favored markets) and innovation performance (measured as patent counts). Furthermore, this curvilinear relationship, they posit, is moderated and strengthened by home-government subsidies the firm receives (calculated as the ratio of annual subsidies received to yearly sales). With archival data of 2,050 Chinese listed manufacturing firms responding to specific OFDI policies during 2013–2021, their predictions are corroborated. Overall, by illuminating the innovation implications of OFDI as corporate response to policies, this study contributes to the international marketing literature in the context of emerging markets.

The Bright Side of Price Volatility in Global Commodity Procurement

This paper studies two competing firms’ choices between the contingent-price contract (CPC) and fixed-price contract (FPC) in global commodity procurement. The FPC price is determined when signing the contract, whereas the CPC price is pegged to an underlying index and remains open until the delivery date. Under both contracts, each firm determines its order quantity based on the updated belief about the market demand. The unrealized CPC price correlates with the market demand, allowing a firm to update its belief about the CPC price using demand information, thereby generating a price-learning effect. We find that, contrary to conventional wisdom, a larger price volatility could benefit the firms, and, under differentiated contracts, a firm might benefit from the improvement of forecast accuracy at its rival. We further show that the price-learning effect plays a critical role in the firms’ contract choices. First, significant price volatility forces the firms to pursue the responsiveness of the CPC. Second, the firms may adopt differentiated contracts to enhance their responses to market changes and dampen competition, and a higher competition intensity more likely leads to contract differentiation. Third, the firms in a small market seek responsiveness and contract differentiation rather than cost efficiency. This study reveals the bright side of price volatility and takes a step toward understanding the effect of two-dimensional information updating. This paper was accepted by Jeannette Song, operations management. Funding: This work was supported in part by the National Natural Science Foundation of China [W. Xing was supported by Grant 72071210, L. Liu was supported by Grant 72371122, and F. Zhang was supported by Grants 71929201 and 72131004]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.00304 .

Can environmental tax promote green M&A in emerging market firms? Evidence from China's heavy polluters

AbstractBased on a sample of heavily polluting firms listed in China, we examine the impact of environmental taxes on the green M&A behavior of these firms. Our findings underscore that environmental taxes have significantly increased the likelihood of heavily polluting firms engaging in green M&A endeavors. This impact is particularly pronounced in areas with high media attention, low financing constraints, and high environmental investment. However, our examination of the economic consequences shows that green M&A does not improve the green innovation performance and ESG performance of firms. The analysis of M&A motivations shows that the majority of heavy polluters' green M&A targets are located in regions with weak environmental regulation, confirming that green M&A under the environmental tax burden is a tool used by firms to engage in pollution transfer. In addition, green M&A under the environmental tax burden is characterized by financial investment, connected M&A, and nonsignificant M&A, confirming that green M&A under the environmental tax burden may be a tool used by companies seeking only the appearance of “greenwashing.” Therefore, green M&A under the environmental tax burden tends to be underpinned by opportunistic motives of pollution transfer and “greenwashing,” rather than substantive green transformation and upgrading. We provide evidence from emerging markets on the impact of environmental taxes on green M&A, which adds to the literature in this area and has policy implications for government regulation of corporate environmental governance practices.

Extreme Weather and Firm Market Value: Roles of Corporate Social Responsibility and Stock Analyst Attention

ABSTRACT The outbreak of extreme weather events is increasing in frequency for the last decade, resulting in tremendous human and industrial losses worldwide. Evaluating and managing the effects of such events are highly urgent matters for firms, but the literature on this topic is limited. In this study, the effects of extreme weather events on the stock market performance of firms were estimated to provide a foundation for exploring how to manage such effects. From the perspective of the shareholder view, the heterogeneous effect of corporate social responsibility (CSR) on stock performance associated with extreme weather events were examined. Data on natural disasters that were caused by six types of extreme weather and occurred between 2001 and 2021 in China were used to construct a database of 2,718 Chinese listed manufacturing firms and 23,529 observations regarding the potential effects by extreme weather events. An event analysis indicated that the extreme weather events bring an average of 0.97% drop in the stock performance of potentially affected firms for the month that the event starts and the next month. A subsequent cross-sectional analysis revealed that a high CSR level is associated with low market value during extreme weather events, while a high level of stock analyst attention alleviates the negative effect of CSR on the stock performance of extreme weather events. This study enriches the existing literature and offers practical insights for managers in the fields of CSR and operations management, highlighting the complex dynamics between CSR activities, analyst attention, and stock market performance during extreme weather events.

How Does Financial Technology Innovation Impact Business Performance?

ABSTRACT Financial technology (FinTech) is transforming traditional financial services and has a significant impact on business performance. This study investigates how FinTech affects the performance of businesses in China. It constructs a FinTech Index based on data from the Baidu Search Index and aligns this index with the financial data of publicly listed Chinese companies over the period from 2011 to 2021. We find that the development of FinTech positively affects corporate performance improvement through external and internal environment mechanisms. The findings reveal that FinTech significantly contributes to business performance by enhancing information transparency, alleviating financing constraints, and improving the efficiency of corporate investment environments. Additionally, we find that the impact of FinTech development on corporate performance exhibits heterogeneity. The beneficial effects of FinTech on corporate performance are particularly noticeable in in eastern regions, groups with lower levels of centralization, and areas with weaker regulatory oversight. The empirical results can be used to help emerging market firms improve their performance and assist investors in identifying worthwhile investment prospects.

Bond market liberalization, technological innovation and firms' position in the global value chain division of labor

Based on the annual data of Chinese listed enterprises from 2004 to 2016, this paper investigates the impact of the opening up of the bond market on the division of labor position of enterprises' global value chains. It is found that the opening up of bond market mainly enhances the division of labor position of enterprises' global value chain by influencing the level of enterprises' technological innovation. The results of mechanism test show that the opening of bond market to the outside world can help enterprises to increase R&D investment, improve technological innovation level and realize the upgrading of the division of labor position in global value chain by alleviating the financing constraints of enterprises and intensifying the competition among enterprises. Heterogeneity analysis shows that the opening up of bond market has a better effect on the GVC status of enterprises in the central and western regions than that of enterprises in the eastern regions.

Corporate tax avoidance and firm value: The moderating role of environmental, social, and governance (ESG) ratings

AbstractIn this study, we examine how managers in firms that have practiced tax avoidance strategically use sustainability activities together with their tax avoidance practices. More specifically, we investigate the moderating impact of ESG on the association between tax avoidance and firm value. Using a sample of French‐listed companies during the years 2012–2021, we hypothesized and found that ESG rating negatively and significantly moderates the relationship between corporate tax avoidance and firm market valuation. Overall, our results suggest that investors reward firms for good ESG performance, perceiving such companies as more valuable. However, when these firms engage in higher tax liabilities, the positive effect of ESG on firm value is slightly reduced. This nuanced insight highlights the importance of considering how tax strategies interact with ESG initiatives in shaping overall firm value. This study, thus, provides theoretical and practical consequences that will encourage businesses and politicians to promote sustainable development. Our findings remain robust to an array of tests, including a number of different tax avoidance measures and potential endogeneity problems.

Enhancing the accuracy of stock return movement prediction in Indonesia through recent fundamental value incorporation in multilayer perceptron

PurposeThe study aims to explore how integrating recent fundamental values (RFVs) from conventional accounting studies enhances the accuracy of a machine learning (ML) model for predicting stock return movement in Indonesia.Design/methodology/approachThe study uses multilayer perceptron (MLP) analysis, a deep learning model subset of the ML method. The model utilizes findings from conventional accounting studies from 2019 to 2021 and samples from 10 firms in the Indonesian stock market from September 2018 to August 2019.FindingsIncorporating RFVs improves predictive accuracy in the MLP model, especially in long reporting data ranges. The accuracy of the RFVs is also higher than that of raw data and common accounting ratio inputs.Research limitations/implicationsThe study uses Indonesian firms as its sample. We believe our findings apply to other emerging Asian markets and add to the existing ML literature on stock prediction. Nevertheless, expanding to different samples could strengthen the results of this study.Practical implicationsGovernments can regulate RFV-based artificial intelligence (AI) applications for stock prediction to enhance decision-making about stock investment. Also, practitioners, analysts and investors can be inspired to develop RFV-based AI tools.Originality/valueStudies in the literature on ML-based stock prediction find limited use for fundamental values and mainly apply technical indicators. However, this study demonstrates that including RFV in the ML model improves investors’ decision-making and minimizes unethical data use and artificial intelligence-based fraud.

Impact of Fintech on labor allocation efficiency in firms: Empirical evidence from China

Fintech has significantly influenced the traditional financial industry by introducing advanced technologies and innovative business models that have resulted in profound impacts. This study examines the effects of Fintech development on labor allocation efficiency and explores its underlying mechanisms. Using a set of Chinese A-share public firms from 2011 to 2020, we find that Fintech development plays a positive role in labor allocation efficiency, mainly by mitigating labor overinvestment. This positive effect is further reinforced by market competition. We also find that the primary pathways of this enhancement include lowering information asymmetry, mitigating agency issues, and substituting low-skilled labor. Moreover, we show that the dimensions of depth and digital integration are particularly important in improving labor allocation efficiency.

Decentralized Finance (DeFi) assurance: early evidence

Decentralized finance (DeFi) has emerged to offer traditional financial services such as lending, borrowing, and trading without intermediaries (e.g., banks). DeFi transactions are typically executed using a special digital class of contracts called smart contracts. These contracts are self-executing and hard-coded directly on a blockchain. We observe the emergence of a new class of voluntary audits that evaluate the integrity of these contracts. Using a hand-coded sample of about 8,500 smart contract audit reports, we provide some of the first evidence showing that (1) these audits are pervasive, (2) the audit firm market is composed of new technical audit firms, (3) the scope of these audits can span a variety of contract features, (4) the audit inputs and outputs differ substantively from those of conventional financial audits, and (5) the market reacts positively to the release of these audit reports, suggesting that these reports are value-relevant. These findings highlight the demand for novel assurance services driven by blockchain technology.

The impact of quality awards on the financial performance of manufacturing industries. Evidence from the Delta region of China

Following provincial quality awards announcements, this study explores whether winners’ financial performance is significantly impacted by the quality award, using OLS and PSM-DID techniques. A placebo parallel trend model is adopted to re-estimate dynamic firms financial performance and test the robustness of the findings. The results show that the quality award significantly impacts manufacturing firms’ financial performance. The regional quality award has significant positive benefits for first-time winners and winning firms located in the Delta region of China. There is a significant positive relationship between the firms’ financial performance and the achievement of quality awards in the long run. The findings expand the research to the relationship between quality awards and firm market value in various institutional contexts. The positive association between a quality award and financial performance confirms the implication for policymakers and the government that a reasonable quality award reduces the quality problem, increases firm value, and supports the awards mechanism in China.

Quantity Conjectural Variations in Oligopoly Games under Different Demand and Cost Functions and Multilevel Leadership

This paper considers a noncooperative game of quantity competition among firms in an oligopoly market under general demand and cost functions. Each firm’s optimal response to the strategies of other firms is assessed by the magnitude and sign of its conjectural variation, expressing the firm’s expectation regarding the counterparty’s supply quantity change in response to the firm’s unit change in its supply quantity. A game of n firms with the sum of conjectural variations (SCV) regarding all counterparties as the generalized response characteristic is studied. The existence of a bifurcation of the players’ response is revealed; a bifurcation is a strategy profile of the game in which both positive and negative responses are possible with an infinite-magnitude SCV value. Methods are developed for calculating the SCV value under different types of inverse demand functions (linear and power) and cost functions (linear, power, and quadratic), and the impact of these characteristics of firms on the bifurcation state is comparatively analyzed.

The Effect of Corporate Social Responsibility on Market and Operating Performance ff Egyptian Firms: The Role of Board Gender Diversity

The Effect of Corporate Social Responsibility on Market and Operating Performance ff Egyptian Firms: The Role of Board Gender Diversity

Quality of Listing Firms in Equity Primary Market in Kenya

Purpose: Kenya has experienced a drought in initial public offerings (IPOs) since 2014. Among varied causes of IPO Drought is decline in demand of IPO shares by retail investors. This paper assert decline in demand is partially attributed to low-quality listings in the past that underperformed in both short- and long-run. Design: The paper investigated quality of listing firms at the time of listing on all IPOs made between 2000 to 2014 in Nairobi Securities Exchange using various dimensions. Findings: The results revealed most of listing firms lacked growth opportunities, reported weak financial performances and engaged in earnings managements. Liberal listing guidelines aiming at attracting firms to list in numbers led to low-quality offerings. Implication: Strategy of liberal listing requirements is counterproductive as demand for the listings keep shrinking due to low-quality of listed firms that underperform in long-run. The study recommends reviewing of listing requirements so that only high-quality firms are allowed to list to keep the market vibrant. As long as low quality offerings are allowed, retail IPO investors will keep off the market as they suffer adverse selection costs

Market Concentration and Firm Value

In this study, we examined the relationship between market concentration using the Herfindahl-Hirschman index and firm values among listed companies in both the markets for the period 2011–2020. We found a negative association between market concentration and firm value. This relationship was mitigated by such factors as dividend payments, auditor size, and financial reporting opacity. This study contributes to the existing literature by corroborating the influences on firm value and addressing the prevailing research paradigm suggesting that market competition is a mechanism for overseeing managerial behavior (i.e., an external corporate governance structure).

Females on Boards and Default Risk in the Chinese Real Estate Industry

This study examines the relationship between female directors on boards and default risk in the Chinese real estate industry. While gender diversity is commonly viewed as an effective governance tool in boards to lower the risk of general market firms, we find that there is little influence with female directors in mitigating the default risk in our sample Chinese real estate firms. Nonetheless, once we partition our sample firms into state-owned enterprises (SOEs) and non-state-owned enterprises (non-SOEs), we observe a significant influence of female directors in lowering the default risk of non-SOEs. We further find that the significant relationship between female board representation and default risk in non-SOEs is attributed to non-SOE firms with high financial constraints and a critical mass of female directors. Our results are robust with a matched sample design, an instrumental variable approach, alternative measures of key variables, and inclusion of additional controls. Overall, our findings highlight the particular circumstances in which board gender diversity is effective in mitigating default risk in the unique environment of the Chinese real estate industry.

Competitive Strategies for Small Audit Firms

Synopsis The research problem We examine whether small audit firms adopt niche strategies to compete in the public company audit market. To that end, we focus on auditors servicing clients from one industry only (which we label as a nationwide single-industry focus) and test its association with audit quality and pricing. Motivation Prior research on auditor competition has mainly focused on the large (mainly Big Four) audit firms. While large and small audit firm markets are two distinct markets, little is known about competitive strategies of small audit firms in the public company audit market. The test hypotheses Our first hypothesis is that small audit firms adopting a single-industry focused strategy supply higher audit quality compared with audit firms that do not adopt a single-industry focused strategy or a simple industry specialization strategy, ceteris paribus. Our second hypothesis is that small audit firms adopting a single-industry focused strategy engage in discount pricing compared with audit firms that do not adopt a single-industry focused strategy or a simple industry specialization strategy, ceteris paribus. Target population The U.S. commercial banking sector covering the period 2004–2020. Adopted methodology Multivariate analyses adopting linear and probit models. Analyses To test our first hypothesis, we run a bank audit quality model using loan loss provisions as the dependent variable for our main analyses. Subsequent analyses adopt restatement, going concern, and internal control weaknesses models. To test our second hypothesis, we rely on a bank audit fee model. All models include relevant controls established in previous research and those for self-selection. Findings The evidence suggests that small audit firms adopting a nationwide single-industry focus are able to provide higher audit quality (compared with other rivals, even industry specialists) while at the same time charging lower audit fees implying cost efficiencies that are passed on to the client due to their focused expertise.