Firms Shift Research Articles

The reinvention of management

PurposeThe author believes that business leaders and writers are increasingly exploring a fundamental rethinking of the basic tenets of management. This paper aims to address this issue.Design/methodology/approachThe paper analyzes five shifts: the firm's goal (a shift from inside‐out to outside‐in); role of managers (a shift from controller to enabler); mode of coordination (from command and control to dynamic linking); values practiced (a shift from value to values); and communications (a shift from command to conversation).FindingsAmong the most important changes being proposed are five basic shifts in management practice.Research limitations/implicationsThis paper offers a creative analysis of current business thinking.Practical implicationsThe raison d'être of the firm shifts from reducing transaction costs to scalable collaboration, learning and innovation.Originality/valueBy adopting a people‐centered goal, a people‐centered role for managers, a people‐centered coordination mechanism, people‐centered values and people‐centered communication the leaders of a firm can focus on the people who are its customers.

Information and Communication Technologies and Skill Upgrading: The Role of Internal vs. External Labour Markets

Following the adoption of information and communication technologies (ICT), firms are likely to face increasing skill requirements. They may react either by training or hiring the new skills, or by a combination of both. We first show that ICT are indeed skill biased and we then assess the relative importance of external and internal labour market strategies. We show that skill upgrading following ICT adoption takes place mostly through internal labour markets adjustments. The introduction of ICT is associated with an upward shift in firms’ occupational structure, of which one third is due to hiring and firing workers from and to the external labour market, whereas two-thirds are due to promotions. Moreover, we find no compelling evidence of external labour market strategies based on excess turnover. In contrast, French firms heavily rely on training in order to upgrade the skill level of their workforce, even if this varies across industries.

Information Aggregation, Investment, and Managerial Incentives

We study the interplay of share prices and firm decisions when share prices aggregate and convey noisy information about fundamentals to investors and managers. First, we show that the informational feedback between the firm's share price and its investment decisions leads to a systematic premium in the firm's share price relative to expected dividends. Noisy information aggregation leads to excess price volatility, over-valuation of shares in response to good news, and undervaluation in response to bad news. By optimally increasing its exposure to fundamental risks when the market price conveys good news, the firm shifts its dividend risk to the upside, which amplifies the overvaluation and explains the premium. Second, we argue that explicitly linking managerial compensation to share prices gives managers an incentive to manipulate the firm's decisions to their own benefit. The managers take advantage of shareholders by taking excessive investment risks when the market is optimistic, and investing too little when the market is pessimistic. The amplified upside exposure is rewarded by the market through a higher share price, but is inefficient from the perspective of dividend value.

Management Insights

Management Insights

Earnings Management Using Discontinued Operations

ABSTRACT: This study investigates whether managers use classification shifting to manage earnings when reporting discontinued operations. Using a methodology similar to McVay (2006), we find evidence consistent with the hypothesis that firms shift operating expenses to income-decreasing discontinued operations to increase core earnings. Our findings also indicate that managers use classification shifting to meet or beat analysts’ forecasts. Finally, we find that, since the introduction of SFAS No. 144, the reporting frequency of discontinued operations has increased; however, the magnitude of classification shifting has decreased. We provide potential explanations for this finding.

Imperfect tax competition for profits, asymmetric equilibrium and beneficial tax havens

We present a model of tax competition for real investment and profits and show that the presence of tax havens in some cases increases the tax revenue of countries. In the first part of the paper, we argue that tax competition for profits is likely to be imperfect in the sense that the jurisdiction with the lowest tax rate does not necessarily attract all shifted profits. Under this assumption, tax competition between a large number of identical countries may lead to either a symmetric equilibrium with no profit shifting or an asymmetric equilibrium where firms shift profits from high-tax to low-tax countries. In the second part of the paper, we introduce tax havens. Starting from a symmetric equilibrium, tax havens unambiguously reduce the tax revenue of countries due to a ‘leakage effect’ — tax havens attract tax base from countries — and a ’competition effect’ — the optimal response to the increased tax sensitivity of tax bases involves a reduction of tax rates. Starting from an asymmetric equilibrium, however, tax havens also raise the tax revenue of countries through a ’crowding effect’ — tax havens make it less attractive to compete for profits and thus induce low-tax countries to become high-tax countries. We demonstrate that the latter effect may dominate the former effects so that countries, on balance, benefit from the presence of tax havens.

Design for Location? The Impact of Manufacturing Offshore on Technology Competitiveness in the Optoelectronics Industry

This paper presents a case study of the impact of manufacturing offshore on technology competitiveness in the optoelectronics industry. It examines a critical design/facility location decision being faced by optoelectronic component manufacturers. This paper uses a combination of simulation modeling and empirical data to demonstrate the economic constraints facing these firms. The results show that production location changes the relative production economics of the two competing designs—one emerging, one prevailing—that are currently perfect substitutes for each other on the telecom market, but not necessarily perfect substitutes in other markets in the long term. Specifically, if optoelectronic component firms shift production from the United States to countries in developing East Asia, the emerging designs that were developed in the United States no longer pay. Production characteristics are different abroad, and the prevailing design can be more cost effective in developing country production environments. The emerging designs, however, have performance characteristics that may be valuable in the long term to the larger computing market and to pushing forward Moore's law. This paper concludes by exploring the dilemma this creates for the optoelectronic component manufacturers and recommending a framework based on which the results may be generalized to other industries.

Disruption‐management strategies for short life‐cycle products

AbstractSupplier diversification, contingent sourcing, and demand switching (whereby a firm shifts customers to a different product if their preferred product is unavailable), are key building blocks of a disruption‐management strategy for firms that sell multiple products over a single season. In this article, we evaluate 12 possible disruption‐management strategies (combinations of the basic building‐block tactics) in the context of a two‐product newsvendor. We investigate the influence of nine attributes of the firm, its supplier(s), and its products on the firs preference for the various strategies. These attributes include supplier reliability, supplier failure correlation, payment responsibility in the event of a supply failure, product contribution margin, product substitutability, demand uncertainties and correlation, and the decision makes risk aversion. Our results show that contingent sourcing is preferred to supplier diversification as the supply risk (failure probability) increases, but diversification is preferred to contingent sourcing as the demand risk (demand uncertainty) increases. We find that demand switching is not effective at managing supply risk if the products are sourced from the same set of suppliers. Demand switching is effective at managing demand risk and so can be preferred to the other tactics if supply risk is low. Risk aversion makes contingent sourcing preferable over a wider set of supply and demand‐risk combinations. We also find a two‐tactic strategy provides almost the same benefit as a three‐tactic strategy for most reasonable supply and demand‐risk combinations. © 2009 Wiley Periodicals, Inc. Naval Research Logistics, 2009

A strategic shift of automobile manufacturing firms in Turkey

This paper examines major business environmental changes influencing a strategic shift of automobile manufacturing firms in Turkey. Within a conceptual model consisting of environmental forces, strategic shift, and mediating variables, including firm size, ownership pattern, and market entry mode, it empirically investigates how such market changes influenced the business strategies of automotive firms in Turkey. The findings indicate that the multinational automotive firms in Turkey have shifted their strategic focus from relying solely on the domestic market to balancing domestic and export markets because of environmental forces. The paper concludes with discussions and suggestions for further research on the subject.

Capital Structure Choice in an Emerging Market: Evidence from Listed Firms in Pakistan

This study empirically examines the determinants of capital structure choice of listed firms in Pakistan. A pooled sample of 535 public listed non-financial companies from 1988 to 2005 is used to establish the relationship between leverage and its determinants by using autoregressive distributed lag (ARDL) econometric framework. The results indicate that size of the firm and growth opportunities are positively related to debt ratio. A highly consistent result is that more profitable and highly liquid firms will avoid debt and will rely mainly on equity financing. Similarly firms with high risk and more tangible assets will use less debt. Moreover the results suggest that state owned firms have been financed heavily through bank loans and that there is a substantial decrease in leverage after the reforms in financial and corporate sector of 1990s in Pakistan. The secondary market development and financial liberalization has been associated with shift of firms from debt market to equity market. There is strong evidence indicating that choice of capital structure differs significantly across industries.

Earnings Management Using Discontinued Operations

This paper investigates whether managers use classification shifting to manage earnings when reporting discontinued operations. Using a methodology similar to McVay (2006), we find evidence consistent with our hypothesis that firms shift operating expenses to income-decreasing discontinued operations to increase core earnings. Our findings also indicate that managers use classification shifting to meet or beat analysts’ forecasts. Finally, we find that since the introduction of SFAS 144, the reporting frequency of discontinued operations has increased; however, the magnitude of classification shifting has decreased. We provide potential explanations for this finding.

Strategy, Incentive Design and Performance: Empirical Evidence

Firms pursuing different business strategies should align these strategies to incentive design. This study uses both archival and survey data on 110 stores of a Japanese high-end bakery chain to provide empirical evidence that misalignment between an organization’s business strategy and incentive design (i.e., weights for financial and non-financial performance measures) adversely affects firm performance. Our results suggest that a decline in the firm performance may be caused by managers’ shifting their focus toward financial measures that are inconsistent with a customer-oriented strategy. Although the firm requires the exclusive usage of non-financial measures in determining promotions, as expected, our results show that financial measures affect managers’ promotions. Additional analyses show that the influence of non-financial measures in promotion decisions becomes less pronounced after the firm shifts to a primarily financial-focused bonus plan.

Diffusion of knowledge through migration of scientific labour in India

This article presents important insights regarding the issues affecting diffusion of knowledge through migration of scientific labour to Indian pharmaceutical firms. The major issues are generational difference of returnees, differences in working culture of Indian firms and western firms, and importantly, differences in the requirement of Indian firms with the skill-sets of returnees. The reverse brain drain of engineers and scientists educated and trained in the US or Europe can accelerate technological upgrading in the Indian economy by providing the skill and know-how needed to help local firms shift to higher value-added activities. The article outlines how Indian firms responded to these issues by adopting global R&D management practices like offering returning post-doctoral scientist positions in middle management. Government policies should also be tuned to industry needs vis-a-vis the returnees. About the book: Reverse brain drain refers to the process wherein human capital moves in reverse gear from an advanced country in the Western hemisphere to a Third-World developing nation that is on the threshold of rapid economic growth. This process transpires when scientists, engineers, technologists and others from the Third-World migrate to comparatively well-developed nations to learn in their universities, undertake research and gain valuable work experience unavailable in their mother countries, then return home after several years of stay abroad to set up a related business or teach in a university or work for a multinational in their respective homelands. In the present global competitive environment, the reverse brain drain from the West will be of vital importance to developing countries. Communities of such foreign trained and educated scientists or engineers can not only set up production units and development centres on their native soil but also provide the skill and know-how required to help local firms shift to higher grades of performance and achievement. The book attempts to give a clear picture on the current scenario of the reverse brain drain in the first decade of the new millennium. It provides an insight into the causes of the brain drain reversal and the roles played by governments, expatriates and immigrants. In the current backdrop of the developing economies in the world today, this book also analyses the strategies required to make the homecoming convenient and lucrative for the returnees whose numbers seem to be increasing day by day.

Human resource management: Challenges for graduate education

Despite a recent paradigm shift in many firms from an employee advocate model to a strategic business partner model, human resource (HR) management is still seen by some as not adding value to organizations. This article briefly summarizes a few of the challenges for HR graduate education at both the master's and doctoral degree levels. Emphasis is placed on the ever-increasing need to produce human resource professionals and managers, in general, who recognize and appreciate the value and relevance of HR's contributions to the attainment of strategic organizational outcomes as a strategic business contributor.

Avoiding Distortion in Corporate Valuation Litigation: An Application of Discounted Cash Flow

Avoiding Distortion in Corporate Valuation Litigation: An Application of Discounted Cash Flow

Managing the Risks of Risk Management

Enterprise Risk Management (ERM) is a field of enormous importance due to its economic repercussion. More and more companies are paying attention to it, given there is significant economic savings for attending to the various aspects of risk. At the same time, ERM has witnessed a shift in the way firms manage the many uncertainties that stand in the way of achieving their strategic, operational and financial objectives. Nevertheless, existing Risk Management Systems (RMIS) are neither powerful, nor flexible enough to model the complexity of the risk management process. In this paper we will examine these issues in greater detail, explaining the existing problem and proposing a software system that addresses them. We will also show the actual design and operation of ARMISTICE (Advanced Risk Management Information System: Tracking Insurances, Claims and Exposures), a successful RMIS case study.

Selling-Price Estimates in Revenue Recognition and Earnings Informativeness

Revenue is one of the largest and most value-relevant items in firms’ financial statements. Based on the “realizable” and the “earned” criteria of SFAC No. 5 (FASB 1984), revenues should reflect both selling price and timing of delivery. Of those two aspects, selling-price estimates are required for revenue recognition when standalone selling prices for products and services are not available. In this study, I examine the effects of such selling-price estimates on the contracting and informational roles of financial statements. Particularly, I examine the setting of SOP 97-2 (AICPA 1997), which removed software firms’ flexibility to recognize revenues using selling-price estimates. I find that the extent to which firms use revenue accruals to manage earnings declined after SOP 97-2 was implemented. Yet, the overall frequency of earnings management did not decline, indicating that firms shift to alternative modes of earnings management when constrained from using revenue estimates to manage earnings. In addition, I find that the value relevant information contained in earnings declined post-SOP 97-2 implementation. Yet, this information was not entirely lost from financial statements, because the deferred-revenue accounts now contain more value-relevant information than before, and a firm’s topline performance is now better ascertained by analyzing both revenue and deferred-revenue accounts. This study shows that SOP 97-2 implementation did not improve the contracting role of earnings; however, its implementation partly shifted the informational role of financial statements from income-statement to balance-sheet components.

Earnings Behaviour of Financially Distressed Firms: The Role of Institutional Ownership

Using a sample of 859 U.S. bankruptcy‐filing firms over the period 1986–2004, we examine the earnings behaviour of managers during the distressed period by looking at sources of abnormal accruals prior to the bankruptcy‐filing year. Results show that managers of highly distressed firms shift earnings downwards prior to the bankruptcy filing. We test and provide evidence in support of two potential contributing factors. First, top‐level management turnover among distressed firms leads new managers to earnings bath choices during the distressed period. Second, qualified audit opinions exert pressure on managers to follow more conservative earnings behaviour during the distressed period. Evidence is also provided that the management of distressed firms with lower (higher) institutional ownership has greater (lesser) tendency to manage earnings downwards. Results also show that higher institutional ownership mitigates the negative abnormal returns of firms with top management turnover. To the authors’ knowledge, this is the first study that attempts to examine whether institutional ownership relates to market reaction in conjunction with a top management turnover or a qualified audit opinion during the distressed period. Prior studies focused on the investigation of earnings management or institutional ownership (separately) during the distressed period, but did not examine if the effect of institutional ownership on earnings behaviour also influences subsequent returns. Thus, the results of this study should be of interest to analysts, standard setters and regulatory bodies since our results show that management turnover, qualified audit opinions and firm governance mechanisms affect the quality of earnings and the level of abnormal returns.

A Note on Agency Conflicts and the Small Firm Investment Decision*

This paper explains how agency conflicts—and potential agency conflicts—can influence the investment decisions of small firms, and provides evidence of these effects using data from a recent survey of small firm investment practices. The survey asks business owners to identify their most important investment concern—overinvestment or underinvestment. We find that underinvestment concerns are more prevalent in growing firms, and those with concentrated ownership and control structures. Overinvestment concerns increase as firms adopt less‐concentrated ownership and control structures. These results suggest that the management challenges facing small firms shift as the degree of separation between ownership and control becomes greater.

A LONGITUDINAL EXAMINATION OF SIGNIFICANT CHANGE IN STAKEHOLDER MANAGEMENT.

Despite rich theoretical development, empirical research on stakeholder management is scant, save its relationship with financial performance which has dominated empirical research for the past two decades. Recent research shows significant intra-firm variability in stakeholder management across time. Our study seeks to explain why firms would experience significant changes in their stakeholder management. Using Wood's (1991) three principles of stakeholder management as our overarching framework, we identify antecedents of change at the institutional, organizational and executive levels. Pressures for legitimacy at the institutional level suggest firm age, size and industry shifts in stakeholder management will increase the likelihood of changes in stakeholder management for the focal firm. We posit organizational risk and performance will also increase the likelihood of change as will managerial discretion and top management team (TMT) turnover. We also consider managerial discretion and TMT turnover to...