Firms In Concentrated Industries Research Articles

Debt choice in the regulated competition era

We examine the impact of intensifying competition laws on corporate debt financing choice. Analogous to the argument that intensifying competition spurs improvements in corporate governance, which decreases the demand for bank monitoring and hence bank debt, we find a negative association between stringent competition laws and bank debt reliance. This effect is amplified for firms with lower information quality, firms in concentrated industries, and firms in countries with weaker institutional environments. Additional analyses show that the bank debt-reducing effect of competition increases overall firm value, which demonstrate the value-enhancing effect of regulated competition. Our study is contributory to the recent debate on reforming competition laws to promote economic growth.

Why do firms adopt employee ownership? An industry perspective

PurposeThis paper offers a new perspective on the potential motivation for the adoption of employee ownership based on market power. Employee ownership may be linked to market power, either through contributing to firm growth that leads to market power or through industry leaders adopting employee ownership as part of rent sharing or a broader consolidation of market position. Both employee stock ownership plan (ESOP) coverage and product market concentration (PMC) have been increasing in the past two decades, providing a good opportunity to see if and how these are related.Design/methodology/approachThe authors predict ESOP adoption and termination using multilevel regressions based on 2002–2012 firm- and industry-level data from the Census Bureau, Compustat and Form 5500 pension datasets.FindingsThe authors find that the top four firms in concentrated industries are more likely to adopt Employee Stock Ownership Plans (ESOPs), while having an ESOP does not predict entering the top four, apart from firm-level predictors. Tests indicate the first result does not reflect simple rent sharing with employees but instead appears to reflect an effort by firms to consolidate market power through the attraction and retention (or “locking in”) of industry talent. Other positive predictors of ESOPs include company size, being in a high-wage industry and having a defined benefit (DB) pension.Research limitations/implicationsTo better distinguish among hypotheses, it would be helpful to have firm-level data on managerial attitudes, strategies, networks and monopsony measures. Therefore, future research using such data would be highly useful and encouraged.Practical implicationsThe paper includes implications for the potential usefulness of ESOPs in attracting and retaining talent and for the design of nuanced policy to encourage more broadly based sharing of economic rewards.Originality/valueWhile prior research focuses on firm-level predictors of employee ownership, this study uses market concentration and other industry-level variables to predict the use of ESOPs. This study makes a unique contribution, broadening the current thinking on firm motives and environmental conditions predictive of firm ESOP adoption.

Unlikely sabotage: Comment on Bloomfield, Marvão, and Spagnolo

Bloomfield, Marvão, and Spagnolo (2023) establish an interesting yet puzzling finding: Firms in concentrated industries that form cartels are more likely to use relative performance evaluation (RPE) compensation arrangements for their top managers. The paper interprets this as evidence that cartel members constrain managers' incentives to engage in costly sabotage when their compensation depends on their peer firms' performance. I argue that successful costly sabotage to gain an RPE advantage is extremely unlikely and that costly sabotage is more likely among cartel firms than non-cartel firms. It therefore is an unlikely explanation of the paper's main finding. I propose an alternative explanation, that RPE benchmarks include firms that are not cartel member firms.

Impact of IFRS adoption on the disclosure of management forecasts by industry concentration

ABSTRACTWe aim to investigate the impact of the adoption of the International Financial Reporting Standards (IFRS) on a firm’s strategic voluntary disclosure decisions under different product market conditions. In the corporate world, firms tactically decide the level of voluntary disclosures considering their benefits, like resolving information asymmetry in the financial market, and costs, like providing proprietary information to their rivals. The adoption of IFRS has affected the demands in the financial market for complementary information, and therefore, it would affect the incentive to withhold corporate information in consideration of proprietary costs in the product market. Using a sample of Korean firms, we find that the likelihood of withholding management forecasts in concentrated industries is weaker in the post-IFRS adoption phase than in the pre-IFRS adoption phase. This is because there are greater demands for corporate disclosures for firms in concentrated industries in the post-IFRS adoption phase than earlier. Moreover, we find that the influence of IFRS on the decision of firms in concentrated industries to disclose management forecasts is significant only for firms with higher market power and higher financial leverage.

Economic policy uncertainty, bank loan, and corporate innovation

We explore the impact of EPU on corporate innovation and identify the mediating role of bank loans in the transmission process to better understand the influencing factors of corporate innovation. Based on Chinese listed firms in the manufacturing industry from 2008 to 2018, we discover that heightened EPU is associated with a significant reduction in bank lending and the granted patents of listed firms. In addition, we find direct evidence of the hindering effect of bank loans on granted patents. The adverse effects of EPU and bank loans on corporate innovation are more prominent for non-SOE firms, firms with difficulty accessing external financing, and firms in concentrated industries. The results indicate that the negative relationship between EPU and corporate innovation cannot be attributed to credit contraction. Further research indicates that bank loans may help to facilitate innovation during periods of high EPU due to the positive influence of short-term loans. Our findings contribute to promoting corporate resilience to EPU shocks and facilitating innovation.

Why Firms in Concentrated Industries are Overpriced in China?

ABSTRACT Firms in concentrated industries (FCIs) might not be as valuable as they priced. Using a product-based monopoly measure for individual firms, we find that FCIs are prone to being overpriced in China stock market. This overpricing cannot be dismissed by varying proxies for arbitrage constraints and risks. Alternatively, it can be attributed to immoderate optimism on FCIs. In line with the optimism explanation, we find that FCIs suffer more serious fundamental declines in high economic policy uncertainty periods and that, the overpricing is corrected during earning announcements. These findings are robust across alternative model specifications and variable constructions.

Local corruption, total factor productivity and firm heterogeneity: Empirical evidence from Chinese manufacturing firms

• A novel dataset to measure local corruption in China that controls for officials’ rank, tenure, investigation reason and corruption latency. • Corruption has a significant negative effect on manufacturing firm TFP, conditional on firm and city heterogeneities. • Publicly owned, export-oriented, profitable, faster growing firms and firms in concentrated industries are less sensitive to corruption. • Firms in cities with higher levels of human capital and public spending on education and scientific research are less sensitive to corruption. • Corruption also hurts private ownership, investment rate, export intensity, innovation, leverage, employment growth, and profitability. This paper examines the effects of local corruption on total factor productivity (TFP) of manufacturing firms in China. The empirical analysis is based on a novel corruption dataset we developed on local corruption in China at various disaggregation levels. The empirical results using fixed effects and instrumental variable estimation methods suggest that corruption has an economically and statistically significant negative effect on firm productivity. The estimated economic cost of corruption is found to be high; a one standard deviation increase in corruption reduces firm TFP by around 3.8%. We also find that firm heterogeneity shapes business reactions to corruption in a given geographical location. Increasing corruption hurts firms less when they are publicly owned, export-oriented, more profitable, have faster growth, or operate in industries with lower levels of competition. We also show that firms in cities with higher levels of human capital and higher levels of public spending on education and scientific research are less sensitive to corruption. As for transmission channels, we find that corruption is likely to hurt TFP through its negative effects on private ownership, investment rate, export intensity, innovation, leverage, employment growth, and profit.

How Do Anti-discrimination Laws Affect Firm Performance and Financial Policies? Evidence from the Post-World War II Period

We exploit the staggered passage of state-level fair-employment laws in the post-World War II period to examine how stronger worker protection against racial discrimination affects firm profitability and financing decisions. We find that firms experience a decline in operating profitability after the passage of anti-discrimination laws. We also document that the adoption of these laws leads to a reduction in debt ratios, which suggests that firms are able to partially offset the negative effects on operating profitability by adjusting their capital structure. Consistent with theoretical predictions, these effects of anti-discrimination laws are more pronounced for firms in states and cities with a greater proportion of African Americans, firms with high labor intensity, firms in states experiencing high African American migration, and firms in concentrated industries. Some of our evidence suggests that anti-discrimination laws lead to a reduction in statistical discrimination or monopsony power rather than taste-based discrimination. Taken together, our results are supportive of theoretical models of discrimination and show that racial discrimination laws significantly affect firm operating performance and financial policies. This paper was accepted by David Simchi-Levi, finance.

The impact of international diversification on credit scores: Evidence from the UK

Despite the great deal of previous research into international diversification, we know little about the impact of international diversification on firms’ credit scores. Drawing upon the resource-based view and transaction cost economics, we examine the relationship between international diversification and credit scores by using a large sample of 6,557 UK firms between 2016 and 2017. We find an inverted U-shaped relationship between international diversification and firms’ credit scores, indicating that the effect of international diversification on credit scores is initially positive but becomes negative with over-diversification. In addition, we find that R&D intensity positively moderates the relationship between international diversification and credit score, implying that the credit scores of highly diversified firms improve as they increase their investment in R&D. Further analysis suggests that a firm’s credit score becomes less dependent on international diversification for large firms, firms in concentrated industries, firms in the manufacturing sector, and firms distant from key metropolitan areas, such as London.

Environmental regulation and green innovation: Evidence from China’s new environmental protection law

This study investigates the impact of China’s new Environmental Protection Law on the green innovation behaviour of listed companies in high-polluting industries. The implementation of China’s strict and new Environmental Protection Law provides a quasi-natural experimental setting for examining the causal effect of environmental regulation on corporate green innovation. Based on data of the application for environmental patents of high-polluting firms listed in Shanghai and Shenzhen Stock Exchanges from 2010 to 2017, this study analyses the change in the green innovation behaviour of firms after the implementation of China’s new and stringent Environmental Protection Law using the PSM-DID approach. We find that firms tend to file more applications for environmental patents, including patents for inventions and utility models after the implementation of the new Environmental Protection Law. Further analysis shows that while this effect is stronger for state-owned enterprises, it is weaker for firms headquartered in cities where economies depend more on the secondary industry. Firms in concentrated industries have more incentive to file applications for green invention patents than those in competitive industries. The study has important implications for policy makers on better implementing the environmental protection law in developing countries.

How Do Anti-Discrimination Laws Affect Capital Structure Decisions? Evidence From the Post-World War II Period

We exploit the staggered passage of state-level fair-employment laws in the post-World War II period to examine how stronger worker protection against racial discrimination affects firm profitability and financing decisions. We find that firms experience a decline in operating profitability after the passage of anti-discrimination laws. We also document that the adoption of these laws leads to a reduction in debt ratios, which suggests that firms are able to partially offset the negative effects on operating profitability by adjusting their capital structure. Consistent with theoretical predictions, the above effects of anti-discrimination laws are more pronounced for firms in states and cities with a greater proportion of African Americans, firms with high labor intensity, firms in states experiencing high African American migration, and firms in concentrated industries. Some of our evidence suggests that anti-discrimination laws lead to a reduction in statistical discrimination or monopsony power rather than taste-based discrimination. Taken together, our results are supportive of theoretical models of discrimination and show that racial discrimination laws significantly affect firm operating performance and financial policies.

The impact of mandatory K‐IFRS adoption on IPO underpricing

AbstractThis paper examines whether mandatory Korean International Financial Reporting Standards (K‐IFRS) adoption in Korea reduces initial public offering (IPO) underpricing. We find that IPO underpricing has increased following the mandatory adoption of K‐IFRS in 2011. We also show that this relation is more pronounced for non‐chaebol firms, firms not backed by venture capital, and firms in concentrated industries. This suggests that the negative impact of K‐IFRS adoption is concentrated on the firms with a greater pre‐adoption information asymmetry. Our results indicate that some policy consideration is needed in order to help investors adapt to the newly adopted standards, especially to those related to firms seeking to go public. (JEL G38, M48).

Corporate Payout Policy in Turkey: Does Market Power Affect the Dividend Payout?

The primary purpose of this paper is to explore the relationship between corporate dividend-payout policy and the competition in the product market for the listed companies in Turkey using a panel data of non-financial firms over the period 2007 to 2015. Turkey is an emerging market classified as a French-civil-law country with weak protection of investors. Using Turkish firms, we analyze the effect of competition on dividend-payout policy, under weak investor protection. Our results indicate that competition measured by the Herfindahl-Hirschman Index and 5-firm concentration ratio significantly affects dividend payout. Our findings show that competition in the industry negatively influences the dividend payout. The results demonstrate that in highly competitive industries, Turkish firms pay lower dividends than the firms in concentrated industries to remain competitive in the market. Moreover, large profitable firms with lower investment opportunities and lower tangible assets distribute higher dividends to their shareholders in Turkey.

Product market competition, oil uncertainty and corporate investment

PurposeThe purpose of this study is to examine the effect of product market competition on the oil uncertainty–investment relation.Design/methodology/approachThe authors use firm-level financial data from the COMPUSTAT database, competition proxies from Hoberg and Phillips (2016) and macroeconomic data on crude oil price uncertainty. Corporate investment is measured as capital expenditure scaled by total assets or as the annual change in (net) total fixed assets plus depreciation. Since our panel data covers a short period (22 years) and the regressions include a combination of a lagged dependent variable and firm fixed effects, the authors apply Blundell and Bond’s (1998) GMM system when regressing corporate investment on the interaction between oil uncertainty and competition.FindingsConsistent with the theories in the irreversible investment literature, the authors first show that investments are negatively related to oil uncertainty. Second, they show that firms in competitive industries decrease their investments in response to heightened uncertainty by a higher degree than firms in concentrated industries, suggesting that competition can exacerbate negative investment outcomes when success is uncertain. The authors also examine how competition relates to investment asymmetric reactions to positive and negative oil price return volatilities and find a stronger negative relationships between competition and investment-positive oil price volatility, indicating that increasing the probability of a negative outcome due to uncertainty leads firms to reduce investment to a larger extent.Practical implicationsThe findings provide useful insights to guide corporate investment decisions under oil price change uncertainty. In particular, if firms can wait for the resolution of uncertainty before deciding to pursue irreversible investment in a competitive market, they can avoid potentially large losses by foregoing investment when the outcomes are unfavorable. This is because competition brings a greater uncertainty to firm performance if the investment outcome is poor, as firms in competitive industries share a large proportion of industry-wide profits with rivals and, thus, competition could erode profit margins and increases the likelihood of being driven out of the market. Hence, firms in competitive markets should balance between strategic preemptive motives and waiting for the resolution of uncertainty before deciding to pursue investment.Originality/valueThis study is the first to examine the effect of competition on the relationship between investment and oil price uncertainty. Moreover, it is the first to examine the effect of competition on the asymmetric response of investment to oil price uncertainty emanating from positive and negative changes in oil price.

Bandwagon effect: Special dividend payments

The objective of this study is to determine whether there is a bandwagon effect of special dividends in United States industries. Specifically, we investigate whether the predictions of the information-signalling hypothesis or the agency theory account for the special dividend behaviour at the industry-level. Out of a broad sample of publicly listed firms in the US market, our results show that rival firms in concentrated industries follow other firms' special dividend announcements. The intra-industry effects of special dividend events indicate positive contagion effects on a rival firm's abnormal returns. Our findings lend credence to the information-signalling hypothesis, rather than to agency theory. This is because special dividends act as signals to convey information to the market on the sustainability of growing industry-wide earnings. The propensity to follow occurs because of industry homogeneity: comparable firms aim to validate the industry signal.

THE EFFECT OF SPONSORSHIP ANNOUNCEMENTS ON STOCK RETURNS: DOES INDUSTRY CONCENTRATION MATTER?

The purpose of this paper is to provide an event study based evidence on whether the effect of sponsorship announcements on stock returns differs based on market concentration. The study sample includes 17 sponsorship announcements occured during the period of 2011 and 2016 for10 firms listed in BIST. In order to test whether stock return is affected by sponsorship announcements, abnormal return (AR), cumulative abnormal return (CAR) were tested by using t-tests for event window [-5, +5]. According to the results, in [-5 +5] event window 13 events revelaed statistically significant AR and CAR before and after the event day. Accordingly, sponsorship announcements are associated with stock returns of sponsoring firms. A Mann-Whitney U test indicated statistically significant difference in abnormal returns between firms operating in non-concentrated industries and firms in concentrated industries. In concentrated markets sponsorship announcements created negative abnormal returns. On the other hand, sponsorship announcements created positive abnormal returns in non-concentrated industries. The study extends the current knowledge through providing empirical evidence for the role of market competitive structure.

Competitive Corporate Social Responsibility

Fifty years after publication of Milton Friedman's seminal article in the NY Times Magazine, the question of corporate social responsibility (CSR) remains an important topical issue. We provide a role for CSR in a fully rational framework even when shareholders care only about profit maximization. CSR is a strategic commitment to emphasize either consumer or employee interests in a multi-stage product market game against rival firms. We find that low cost firms in concentrated industries engage in higher levels of CSR and have higher profits. Empirical tests of the main hypotheses are confirmatory: low cost firms use more CSR; market to book increases in CSR and a dynamic test of firms migrating to less concentrated industries exhibit reductions in CSR.

A Proposal to Limit the Anti-Competitive Power of Institutional Investors

Recent scholarship has shown that mutual funds and other institutional investors may cause softer competition among product market rivals because of their significant ownership stakes in competing firms in concentrated industries. While recent calls for litigation against them under Section 7 of the Clayton Act are understandable, private or indiscriminate government litigation could also cause significant disruption to equity markets because of its inherent unpredictability and would fail to eliminate most of the harms from common ownership. To minimize this disruption while achieving competitive conditions in oligopolistic markets, the Department of Justice and the Federal Trade Commission should take the lead by adopting a public enforcement policy of the Clayton Act against institutional investors — the original authors of the Act intended it to be used. We outline such a policy in this article. Investors in firms in well-defined oligopolistic industries must choose either to limit their holdings of an industry to a small stake (no more than 1% of the total size of the industry) or to hold the shares of only a single “effective firm.” Investors that violate this rule face government litigation. Using simulations based on empirical evidence, we show that under broad assumptions this rule would generate large competitive gains while having minimal negative effects on diversification and other values. The rule would also improve corporate governance by institutional investors.

Product market competition, R&D investment, and stock returns

A standard real options model predicts a strong positive interaction effect between research and development (R&D) investment and product market competition. R&D-intensive firms tend to be riskier and earn higher expected returns than R&D-weak firms, particularly in competitive industries. Also, firms in competitive industries earn higher expected returns than firms in concentrated industries, especially among R&D-intensive firms. Intuitively, R&D projects are more likely to fail in the presence of more competition because rival firms could win the innovation race. Empirical evidence largely supports the model׳s predictions.

Private Antitrust Litigation: Procompetitive or Anticompetitive?

The antitrust laws are intended to permit procompetitive actions by firms and deter anticompetitive actions. We consider firms' incentives to use the antitrust lawsuits for strategic purposes, in particular to prevent procompetitive efficiency-improvement by rival firms. Our main result is that, ceteris paribus, smaller firms in more fragmented industries are more likely to use the antitrust laws strategically than larger firms in concentrated industries.