Firms In More Competitive Industries Research Articles

Access to Financial Disclosure and Knowledge Spillover

ABSTRACT Access to firms’ innovation outputs determines the extent of knowledge spillover that poses risk to innovation appropriability. We provide plausibly causal evidence that processing costs of financial disclosures, which inform users of the economic value of innovation, play a key role in firms’ management of knowledge spillover. We exploit an exogenous, randomly assigned, and staggered policy shock by the SEC that reduces processing costs of mandatory financial disclosures. In response, firms reduce patenting rates, with the effect concentrated among firms in more competitive industries and with lower costs of capital. Firms also reduce their patent disclosure quality. Our results suggest firms rely more on trade secrecy as their innovation property protection mechanism. Lower processing costs of financial disclosures affect neither innovation inputs nor voluntary disclosure practices. Our results show that firms strategically manage access to their innovation outputs through financial disclosures, patent disclosures, and trade secrecy to curb knowledge spillover. JEL Classifications: D23; G30; O31; O32; O34.

Institutional cross‐ownership and trade credit: Evidence from China

AbstractResearch Question/IssueRelying on enhanced market power and improved information environment associated with institutional cross‐ownership, this paper examines the relation between institutional cross‐ownership and trade credit in China.Research Findings/InsightsListed firms with cross‐ownership can obtain more trade credit. The main conclusion is robust when we consider endogeneity problems, alternative measures of institutional cross‐ownership, and the effect of a financial crisis. Further, we perform several tests to examine the influencing mechanisms, confirming that the positive relation between institutional cross‐ownership and trade credit is more pronounced for listed firms in more competitive industries, or with poorer information environment. Further analysis also finds that the positive effect of institutional cross‐ownership on trade credit is more prominent for listed firms with fewer bank loans.Theoretical/Academic ImplicationsThis paper emphasizes information sharing and cooperation among listed firms with institutional cross‐ownership and argues that the information improvement effect is a relatively more important mechanism in affecting listed firms' decisions.Practitioner/Policy ImplicationsChina's market‐oriented reform is in progress and shows some weaknesses in corporate governance and investor protection. The research focusing on institutional cross‐ownership can provide useful suggestions for policy makers on how to improve corporate governance and construct efficient capital markets.

The Impact of Social Insurance Law on Corporate Innovation: Evidence from a quasi-natural experiment

The implementation of China's Social Insurance Law initiated changes in the management and collection of social insurance premiums. The effect of this collection related to labor cost and employee welfare on innovation remains unexplored. We use a difference-in-differences model based on unique data in China and reveal that social insurance premiums collection following the implementation of Social Insurance Law appears to significantly contribute to innovation. Both labor cost and employee welfare effects are inducement mechanisms. Additional tests suggest that the relationship between Social Insurance Law and innovation is more pronounced for state-owned enterprises, firms with a superior legal environment, and firms in more competitive industries. The above findings offer new insights into the real impact of the social insurance system reform on advancing China's economic development and suggest strategies to drive innovation through the implementation of the Social Insurance Law.

Frenemies: Corporate Advertising Under Common Ownership

In this paper, we investigate the impact of ownership structure on corporate advertising expenditures. Using mutual fund mergers as an exogenous shock to ownership structure, we find that competing firms owned by the same institutional blockholders experience a significant reduction in advertising expenditure. The reduction in advertising expenditure is more likely to occur in the presence of higher coordination benefits or lower coordination costs. Specifically, this effect is more pronounced for firms in more competitive industries, in higher advertising-intensity industries, with greater common ownership, with more concentrated institutional ownership, and with headquarters located in the same state. Overall, our empirical evidence indicates that ownership by common institutional investors significantly affects corporate advertising strategy. This paper was accepted by Matthew Shum, marketing.

Competition, asset build up and export incentives: The role of imperfect credit market

This paper studies the export incentive of credit rationed, competitive and homogenous firms through asset build up highlighting the generic trade-off between competition and asset value in an imperfect credit market where poor and rich firms have different levels of assets. It is a contribution to the issues related to finance and trade in developing countries as raised first in Jones and Marjit (2001, AER). Our theoretical and empirical results indicate that although firms in more competitive industries are likely to be exporters, history of greater local competition before the entry of firms into export market i.e. under autarky, hurts export incentive by limiting cash flows and asset build up. In our set up more intense local competition hence lower price is an advantage to access global markets, but associated low profits and hence lower assets acts a detriment.

Product market competition and the cost of equity capital

This paper provides empirical evidence that firms in more competitive industries have lower cost of equity capital than those in concentrated industries. The association between product market competition and the cost of equity capital is more pronounced with lower analyst coverage, lower forecast accuracy, higher forecast dispersion, and higher bid-ask spread. Using import tariff rate reductions as a quasi-natural experiment, we find that tariff reductions intensify domestic product market competition, which in turn reduces firms’ cost of equity capital. When the tariff rate reduction is larger, the more intensified competition reduces the cost of equity capital to a greater extent. Tariff rate reductions also influence firms’ financing policy, cash flow from operations, and growth rate.

Common Ownership and Corporate Social Responsibility

Abstract This paper studies the effect of common ownership on corporate social responsibility (CSR). We find that common ownership is positively associated with a firm’s CSR score. The effect is stronger for firms in more competitive industries. We propose a two-stage duopoly game in which CSR serves as a commitment device to expand output aggressively to understand the empirical results. (JEL G30, D21, D22, L13, L21, L22) Received December 10, 2019; editorial decision September 9, 2020 by Editor: Gregor Matvos. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Do confident CEOs increase firm value under competitive pressure?

ABSTRACT Traditional studies show that CEOs’ overconfidence can mitigate underinvestment problem that occurs due to risk-aversion. To extend this argument, we investigate whether investment by overconfident CEOs always increases firm value. Theoretically and empirically, we show that investment by overconfident CEOs and firm value is positively related for firms in more competitive industries. For firms in less competitive industries, the relation is insignificant. Our findings suggest that CEOs’ overconfidence can be a desirable managerial trait for shareholders under certain conditions.

Common Ownership and Corporate Social Responsibility

This paper studies the effect of common ownership on corporate social responsibility (CSR). We find that common ownership is positively associated with a firm's CSR score. The effect is stronger for firms in more competitive industries. We propose a two-stage duopoly game in which CSR serves as a commitment device to expand output aggressively to understand the empirical results.

Corporate Social Responsibility, Shareholder Value, and Competition

This study examines the relationship between corporate social responsibility (CSR), shareholder value, and competition by applying a regression discontinuity design to the outcome of CSR shareholder proposals. This approach effectively compares outcomes between proposals that pass or fail by a small margin which provides a causal estimate of the impact of CSR. I find that passing a proposal generates positive abnormal returns. This effect is stronger in firms with lower CSR scores, firms in more competitive industries, and firms subject to higher customer awareness. In addition, passing a proposal also increases the CSR scores of both firms and peers, suggesting that these votes induce higher CSR engagement by competitors. Finally, I identify an increase in the market share of companies that approve close-call proposals. Altogether, these results suggest that CSR improves shareholder value by enhancing the competitiveness of firms.

Capital market frictions and human capital investment: Evidence from workplace safety around regulation SHO

AbstractThis paper examines the effect of capital market frictions on firms’ workplace safety. Using Regulation SHO as a natural experiment, we find a significant increase in work‐related injury rates of pilot firms. The effect is stronger for firms in more competitive industries and with high financial constraints, and weaker for firms whose employees have high negotiating power and with good corporate governance. Further tests suggest that managers’ myopia shifts their focus away from investments in workplace safety when workplace safety is not related to firm performance. Overall, the results highlight how capital market frictions affect firms’ investment in human capital.

Disclosure Quality Rankings and Stock Misvaluation – Evidence from Chinese Stock Market

ABSTRACT Using SZSE’s disclosure rankings data, this paper studies the relation between firms’ disclosure quality and stock mispricing in emerging markets. We find that higher disclosure ranking grades, the proxy for disclosure quality, is associated with less stock misvaluation in the sense that market price deviates less from its fundamental. We also investigate the variation in this relation across industries and time. Our results document that the association between disclosure ranking grades and stock misvaluation is stronger for firms in more competitive industries. This finding suggests that higher disclosure ranking grades help draw more investors’ attention, which will reinforce the role of corporate disclosure in reducing stock misvaluation. In addition, increase in disclosure ranking grades is more effective in reducing stock misvaluation in years prior to China’s Split Share Structure Reform (SSSR), which is consistent with our conjecture that corporate disclosure is more valuable in promoting pricing efficiency when private information collection activities are less active.

Employee‐friendly practices, product market competition and firm value

AbstractIn this paper, we examine whether employee‐friendly practices are associated with product market competition, and whether firm value is related to employee‐friendly practices and product market competition. Using a large sample of US firms, we find positive and significant associations between employee friendliness and product market competition, and between firm value and employee friendliness when product market competition is high, consistent with the value creation theory. Both positive relations hold when we account for corporate governance. In addition, using the list of Fortune's ‘100 Best Companies to Work For’ as an alternative measure of employee‐friendly policies, we find firms in more competitive industries are more likely to treat their workers favourably. Furthermore, we find that the market reaction is more positive when firms in more competitive industries are selected for the Fortune list.

Capital Market Frictions and Human Capital Investment: Evidence from Workplace Safety around Regulation SHO

Using Regulation SHO as natural experiment, we find that work-related injury and illness rates increase significantly at treated firms relative to the control group. The effect is more pronounced for firms in more competitive industries, firms in which labor has low negotiating power with management, and those that are more financially constrained or with poor corporate governance. Further, this effect is not explained by salient firm performance characteristics and is stronger for firms whose stock returns are less sensitive to injury rates. Overall, the results shed light on how capital market frictions impact firms’ investment in workplace safety.

Capital Structure Under Imperfect Product Market Competition: Theory and Evidence

We show how product market competition affects capital structure by developing a tractable model that embeds the tradeoff between the tax benefits and bankruptcy costs of debt in an industry equilibrium setting with heterogeneous, imperfectly competitive firms. Different determinants of competition—fixed production costs and product substitutability—have contrasting implications for the effects of competition on firm leverage. Firms in more competitive industries with greater product substitutability are more leveraged, whereas firms in more competitive industries with lower fixed production costs have lower leverage. We show robust support for our predictions in our empirical analysis of U.S. nonfinancial firms.

Cross-border vs. domestic acquisitions: Evidence from India

We examine the domestic and cross-border acquisition decision of Indian firms in the nine-year period from 2002 to 2010, a period following economic liberalization in India. Acquisition activity, both domestic and cross-border increased over the period. We find that larger, younger firms, firms with cash on hand, firms with low leverage, and relatively overvalued firms are more likely to make an acquisition. Such firms also prefer to make a cross-border acquisition compared to a domestic acquisition. Firms with lower levels of promoter (founding shareholder) holdings, larger boards, and belonging to a business group are more likely to make an acquisition, but are indifferent between making domestic and cross-border acquisitions. Industry competition is a significant determinant of acquisition activity with firms in more competitive industries more likely to make an acquisition and more likely to make a cross-border acquisition compared to a domestic acquisition. Our results hold controlling for acquisitions by manufacturing firms, prior acquisition experience, and taking into account alternate growth strategies followed by firms.

Ties That Blind - The Impact of Non-Compete Provisions on the Tone of Earnings Press Releases

Earnings press releases are a timely vehicle for communicating a firm's performance and can be used to manipulate the perception of the managers' achievements. We argue in this paper that the enforcement of non-compete provisions in CEO employment contracts induce managers to manipulate the qualitative information contained in earnings press releases to minimize their exposure to forced terminations. Based on a sample of 26,000 earnings press releases of S&P1500 firms between 2004 and 2013, we are the first to directly show that, in order to attenuate their career concerns, managers in states with a higher enforceability of non-compete provisions are more likely to manipulate upward the tone of their earnings press releases. Moreover, we find that the effect is more pronounced for less capable and more junior CEOs, for firms with more intense monitoring, and for firms in more competitive industries. Consistent with investors recognizing the impact of non-compete provision enforcement on managers' strategic use of words, we further find a statistically and economically significant incremental discount by investors on the tone of earnings press releases of firms in high enforceability states.

Product Market Competition and Industry Returns

This paper shows that product market competition has two opposing effects on asset returns. The first relates to the pro-cyclical nature of the value destruction from expansion of competitors, which lowers exposure to systematic risk in more competitive industries. The second is related to the narrower profit margins due to competition, which increase exposure to systematic risk. We find that the first effect dominates the second, so that firms in more competitive industries generally earn lower asset returns. Our results are robust to using five alternative measures of competition and to controlling for the sample selection bias of publicly-listed firms.

CUSTOMER SATISFACTION AND CORPORATE INVESTMENT POLICIES

This paper examines the effect of satisfaction with firms’ products and services on their capital investment policies. Using data from the American Customer Satisfaction Index from 1994 to 2013, the results of the regression models show that firms with higher customer satisfaction will invest more heavily in capital expenditures in the future. The results further show that this positive effect is more pronounced for firms with less growth opportunities or a high cost of capital. This would include those firms with low market-to-book ratios, young and small firms, or firms in more competitive industries. Overall, this study argues that customer satisfaction is an important factor affecting the firm’s investment policy. The findings provide a better understanding of the role of customer satisfaction which can generate growth opportunities, reduce cost and motivate a firm to invest more in capital.

Strategic growth option, uncertainty, and R&D investment

This paper investigates the effect of uncertainty on R&D investment. We find that firms invest more in R&D when they face higher uncertainty, as measured by idiosyncratic return volatility. We further show that the effect is more pronounced for firms in more competitive industries as well as for firms whose products have less market power. Overall, our findings support the theory of strategic growth option in which firms under competition follow preemptive strategy when they face high uncertainty.