Firm Adjustment Research Articles

Ownership structure, adjustment speed toward target leverage and CEO power

PurposeThis study aims to investigate the impact of ownership structure on firm adjustment speed toward the target leverage.Design/methodology/approachThe study employs a partial adjustment model on a sample of 694 publicly listed firms from 2007 to 2021 in Vietnam.FindingsThe study finds that state and foreign ownerships inhibit the speed at which firms approach their optimal level of debt. Interestingly, this negative association is less pronounced in firms managed by powerful CEOs (duality CEOs; highly experienced CEOs; CEOs who they own or their families possess a large number of shares). Further, state and foreign ownership are found to be positively associated with firm performance. This beneficial impact weakens, however, when firms use more debts.Originality/valueThe outcome reveals that having a powerful CEO on board can help businesses in this emerging market counteract the detrimental effects that foreign and state ownership leave on the process of adjusting leverage.

Hold or Hurry? How Firms Adjust Their Speed of Imitation in the Face of Technological Transitions

Hold or Hurry? How Firms Adjust Their Speed of Imitation in the Face of Technological Transitions

How Firms Adjust Rhetorical Optimism in Public Communications in Response to Anticorruption Shocks

How Firms Adjust Rhetorical Optimism in Public Communications in Response to Anticorruption Shocks

Joint optimization of dynamic pricing, quality, and production quantity in the presence of online reviews: A distributionally robust optimization approach

This paper investigates the joint pricing, product quality, and production quantity decisions of a firm in a two-stage scenario, considering potential market demand uncertainty and the existence of online reviews. Two decision models are established based on whether the firm adjusts product quality and prices according to consumer feedback from reviews: a static model (as a baseline) and a dynamic model. In the static model, the firm decides product quality, prices, and production quantity in the first stage, while in the second stage, the firm does not enhance product quality, and prices remain unchanged. In the dynamic model, in the first stage, the firm decides initial product quality and pricing, then in the second stage, adjusts product quality based on consumer feedback and sets pricing accordingly. We propose a distributionally robust optimization (DRO) method to address this problem, obtaining a closed-form solution for the expected profit function under the worst distribution, making it easy to determine the optimal decision. Through numerical simulation analysis, we find that the firm implementing dynamic decisions always make higher profits compared to those using static decisions. This highlights the superiority of dynamic decisions in adapting to market changes and improving product quality. We also analyze the impact of expected and standard deviation of potential market demand, as well as consumer private assessment weight, on business decisions and profits. Our research provides effective support for firms with limited market information, enabling them to better formulate joint pricing, quality, and production decisions.

Uncovering the dark side of AI-based decision-making: A case study in a B2B context

Over the last decade, many organizations worldwide have been assimilating Artificial Intelligence (AI) technologies to increase their productivity and attain a competitive advantage. As with any technology, intelligence systems come with potential downsides. Despite the efforts to mitigate any negative consequences of AI, businesses and employees continue to confront the dilemmas of adopting AI, so it is essential to explore in detail the rising concerns around such technologies. In this paper, we used a single case study to investigate the dark aspects of AI in a Norwegian energy trading firm. We gathered data through semi-structured interviews and secondary data. Specifically, we interviewed AI managers, traders and developers who have worked on deploying and using AI tools over the last three years. Our aim is to identify the dark side of AI use in trading, how AI trading bots affect the relationship between traders and AI developers and how the firm adjusts to this new reality. The findings indicate that negative or unintended consequences of AI can be grouped into three clusters related to (1) the nature of the work; (2) conflicts and effects; and (3) responsibility. The paper concludes with future research and practical implications that can help organiziations mitigate the negative aspects of AI use.

Multi-product firm price and variety response to firm-specific cost shocks

A large literature studies how prices respond to changes in market conditions. More recent work examines firm adjustments along the product quality and variety channels. We present a theoretical model of heterogeneous, multi-product firms to characterize the response of firms to idiosyncratic cost shocks along the price and variety channels. The model delivers rich implications and interesting trade-offs between the two channels. Large firms respond to a cost increase by raising both prices and scope. Relative to smaller firms, they respond more through scope than prices. Availability of the variety channel eases pressures to absorb cost changes and increases pass-through.

Trade, location, and multi-product firms

In this paper we study how trade liberalization affects the location and the product scope of firms. We find that the largest and most productive multi-product firms concentrate to the larger market as a result of trade liberalization. In the presence of relocation costs, we also find that these firms will expand their product scope in the larger market while firms in the smaller market will contract their product scope or expand it to a smaller degree. The adjustment of firms’ product scope can therefore be a substitute for firm relocation, and the cost of introducing new varieties becomes an important parameter, that influences the degree of agglomeration.

When Do Firms Adjust Bonus Targets Intrayear? Evidence from Sales Executives' Targets*

ABSTRACTThis study investigates when and why intrayear bonus target revisions occur. This is important as intrayear target revisions occur regularly in practice but are not well understood. Specifically, we analyze two potential drivers of intrayear bonus target revisions: reduced managerial incentives owing to managers dropping out of the incentive zone of their piecewise defined bonus function and potential spillovers from planning target revisions that reflect changes in performance expectations during the year. We also investigate the effects of organizational characteristics on intrayear bonus target revisions. Using data collected from sales executives via multiple waves of surveys, we find evidence for both predicted drivers. In addition, consistent with our predictions, we find that the levels of delegated decision authority, intrafirm interdependencies, and information asymmetry negatively moderate the positive association between reduced managerial incentives and revision likelihood. Our paper contributes to the target setting literature by being the first study to investigate intrayear bonus target revisions and shed light on when firms commit to not revising such targets intrayear.

The Many Channels of Firm's Adjustment to Energy Shocks: Evidence from France

The Many Channels of Firm's Adjustment to Energy Shocks: Evidence from France

Labor Market Regulation and Firm Adjustments in Skill Demand

Labor Market Regulation and Firm Adjustments in Skill Demand

How Do Firms Adjust When Trade Stops?

How Do Firms Adjust When Trade Stops?

Speed of Adjustment of Capital Structure (Empirical Study on the Aviation Industry in Indonesia and Malaysia)

The purpose of this study is to prove how much SOA capital structure, what factors affect the optimal leverage and what factors affect the SOA capital structure in the airline industry in Indonesia and Malaysia. Hypothesis testing in this study was conducted using panel data regression. The sample used is 10 aviation industry companies in Indonesia and Malaysia with 100 observations from 2010-2019. The regression model is determined based on the results of the Chow and Hausman tests. Empirical findings from 100 observations of panel data variables of company size, short-term debt and non-debt tax shield have a positive and significant effect on optimal leverage. Profitability, asset growth, and business risk variables have a negative and significant effect on optimal leverage. Partial adjustment model (PAM) to measure the speed of firm adjustment to optimal leverage. From the partial adjustment model estimation results, the significant leverage lag indicates that airline industry companies in Indonesia and Malaysia adjust their capital structure towards optimal leverage with SOA of 46.20% per year. Generalized methods of moments (GMM) to estimate the speed of capital structure adjustment. The results show that macroeconomic variables, namely GPD growth, have a negative and significant influence on the speed of capital structure adjustment. In conclusion, it is evident that the funding behavior in the airline industry in Indonesia and Malaysia tends to follow the dynamic trade off theory.

Sanctions against Iran, political connections and speed of adjustment

This study examines the effect of intensifying economic sanctions against Iran on speed of adjustment (SOA) in firms listed on Tehran Stock Exchange during 2001–2018. We find evidence that firms adjust their leverage toward the target at a lower speed in high-intensity sanctions than low-intensity sanctions. Moreover, we indicate that the negative impact of the intensification of sanctions on SOA is stronger for politically connected firms than other firms. Our results are robust to an alternative set of leverage determinants, two alternative definitions for sanctions intensity, an alternative measure for political connections, and an alternative two-step process for hypotheses testing.

How Do Firms Adjust to Negative Labor Supply Shocks? Evidence from Migration Outflows

How Do Firms Adjust to Negative Labor Supply Shocks? Evidence from Migration Outflows

Do Firms Adjust Corporate Social Responsibility Engagement After a Focal Change in Credit Ratings?

This study revisits the relation between corporate performance and corporate social responsibility (CSR) in the context of a major shift in firms’ credit risk status. Relying on corporate credit rating as a performance indicator, we examine whether firms under the scrutiny of rating agencies trade-off CSR engagement for credit quality improvement. To explore whether firms adjust their CSR engagement after a focal rating change, we focus on the investment–speculative grade threshold because of its importance in accessing the public debt market. We find that firms that lose the investment grade rating subsequently increase CSR engagement. We also uncover that improving CSR engagement helps firms restore their credit ratings ex post. Our findings support the view of CSR engagement as a valuable risk management strategy.

Shariah Compliance and Corporate Cash Holdings

This study investigates the influence of shariah compliance status on firms’ cash holding levels and speed of adjustment in non-financial firms listed in six Gulf Cooperation Council (GCC countries) from 2005 to 2016. It shows that shariah compliance status has a significant effect on firms’ cash holding decisions. Shariah-compliant firms have significantly higher cash holding levels than non-shariah-compliant firms. Further, shariah-compliant firms adjust more quickly to their target cash holdings than do their conventional counterparts. In our view, shariah-compliant firms are subject to multiple restrictions that limit their external financing channels; therefore, holding larger cash reserves is important as such firms are financially constrained and gain from the transaction cost motive of holding cash. The findings of the study have important implications for regulators, investors and managers. To the best of our knowledge, this study is the first to compare the effect of shariah compliance on firms’ cash holdings and speed of adjustment towards the trade-off theory’s optimal cash holding target.

Do Firms Adjust Board Gender Diversity in Response to Economic Policy Uncertainty?

We explore the effect of economic policy uncertainty on board gender diversity. Prior research shows that female directors play a beneficial role. The advantage of board gender diversity should be particularly helpful when firms have to navigate an uncertain environment. So, we hypothesize that firms adjust their board gender diversity in response to economic policy uncertainty. Consistent with our hypothesis, we find that firms significantly raise board gender diversity in response to economic policy uncertainty (EPU). To draw a causal inference, we exploit the 9/11 terrorist attack as an exogenous shock that elevated EPU unexpectedly. Our instrumental-variable analysis corroborates the results. Finally, we show that board gender diversity substantially mitigates the adverse effect on shareholder wealth brought about by an unanticipated negative shock attributed to the 9/11 attack.

How do Spanish unlisted family firms rebalance their capital structures?

PurposeThis paper seeks to analyze the family firm's capital structure decisions, focusing on the speed of adjustment (SOA) as well as on the effect of distance from the target capital structure on the SOA towards target short-term and long-term debt ratios in unlisted small and medium-sized family firms.Design/methodology/approachMethodologically, we use dynamic panel data estimators to estimate the effects of distance on the speeds of adjustment towards those targets. Data for the period 2006–2014 were collected for two research sub-samples: one sub-sample with 398 family firms; the other sub-sample contains 217 non-family firms.FindingsThe results show that the deviation from the target debt ratios impacts negatively on the speeds of adjustment towards target short-term and long-term debt ratios in unlisted family firms. These results suggest that family firms, deviating from target debt ratios, face deviation costs, i.e. insolvency costs, inferior to the adjustment costs, i.e. transaction costs. Therefore, family firms stay away from the target debt ratios for a long time than do non-family firms.Research limitations/implicationsThe research sample comprises a low number of family firms, therefore for future research we suggest increasing the size of the sample of family firms to get a deeper understanding of family firms' SOA towards capital structure. Additionally, we suggest the analysis of other potential determinants of the speed of adjustment towards target capital structure.Practical implicationsThe results obtained suggest that the distance from the target short-term and long-term debt ratios can be avoided if these firms do not depend almost exclusively on internal finance to adjust towards target capital structure. Moreover, for policymakers, we suggest the creation/promotion of alternative external finance sources, allowing reduced transaction costs that contribute to a faster adjustment of small family firms towards target capital structure.Originality/valueThe most previous research focusing on capital structure decisions have focused on listed family firms. To fill this gap, this study examines the speed of adjustment towards target debt ratios in the context of unlisted family firms. Moreover, transaction costs are a function of debt maturity, therefore this study examines separately the speeds of adjustment towards target short-term and long-term debt ratios. This paper shows that the adjustment costs (i.e. transaction costs) could hold back family firms from rebalancing its capital structure.

Antidumping and heterogeneous quality adjustment of multi-product firms: Evidence from Chinese exporters

This paper investigates the effect of antidumping on multi-product firms’ adjustment in export quality using highly disaggregated Chinese exports data at the firm-product-country level for the period 2000–2014. In response to antidumping, firms tend to upgrade the quality of their exports for targeted products in affected markets by product adjustment, with this effect being more pronounced for firms with ex ante higher product quality. Antidumping induces resource reallocation across firms for a product such that higher-quality firms upgrade the quality while lower-quality firms are unaffected, and reallocation across products within a firm with the quality of products of higher competency increasing more substantially under antidumping policy. Our paper contributes to our understanding on how a multi-product firm adjusts by reallocating resources across products in the face of trade policy shocks.

Does collective bargaining influence the way the size of the firm impacts wage dispersion? Spanish evidence

PurposeThis paper analyses the relationship between wage dispersion and firm size within a “two-tier” system of collective bargaining (firm bargaining and multi-employer bargaining levels). Collective bargaining has a decisive role in setting wages in Spain, and its regulation highly limits the possibility for smaller firms to negotiate their own collective agreement.Design/methodology/approachBased on the Spanish Structure of Earnings Survey 2006, 2010 and 2014, the authors use variance decomposition in order to deeply analyse the effect of bargaining level on wage dispersion and compare the value of each decile of the distribution of wages for the purposes of identifying the quantitative differences in wage compression.FindingsIn general, the outcomes positively linked firm size and firm bargaining to wage dispersion. However, if firm size is taken into account, the effect of firm bargaining is limited among small firm workers because this type of firm is not usually covered by firm bargaining. On the other hand, the time analysis allows observing a wage compression that follows different patterns depending on firm size, compressing the higher part of the distribution in case of small firms and the lower part in case of large firms. This should be explained by the fact that wage negotiation is dependent on firm size.Social implicationsFirm size has determined firm adjustment strategies to face the recent economic crisis and allows to evaluate the impact that changes in collective bargaining can have on wage distributionOriginality/valueThere is no research that has tried to analyse the relationship between wage dispersion and firm size in a context where collective bargaining is essential to understand the wage structure. Normally, firm size plays a decisive role in wage policy given that the capacity of a company to negotiate an agreement is closely linked to its size.