Firm Operating Research Articles

Structural Characteristics of Africa and Its Place in the International Arena

Decades after gaining independence, most African states depend on their relations with their past colonisers to ensure continuity in terms of economy and legitimacy. Further they depend on developed states foreign aid and foreign institutions to maintain their structural integrity. This had created an element of dependency that even with the reality that states in Africa have vast and wealthy resources, which if well used can drive them to global economic standards, they still fail to be self sufficient and fail to provide tailor made solutions to their needs. This is more so evident in Africa's economic integration. States in Africa have established regional economic blocks such as COMESA, SADC, ECOWAS etc. and instead of promoting intra linkages between themselves, these blocks have looked to create vertical linkages with Western economies in terms of trade and investments. Further, the heavy dependence on foreign aid and the operations of multinational firms in Africa derive an element of neo colonialism. Such European franchises and corporations are economically exploiting African states while introducing cultural domination.

Technology Licensing and Productivity Growth: Evidence from Manufacturing Firms in Developing Economies

Problem Definition: This study examines whether and how the relationship between technology licensing and productivity growth in the short run is affected by the challenges and constraints inherent in the contexts in which developing economy firms operate. We do so by investigating the moderating role of formal workforce training program in a firm and the corruption level and the infrastructural constraint level in the firm's external environment. Academic/Practical Relevance: Although the adoption of foreign technology by developing economy manufacturing firms is often driven by the goal to strengthen their capabilities in the long run, prior research provides a limited understanding of the performance consequences of technology licensing in the short run, which is an important business reality. Our study serves to address this important gap in research and practice. Methodology: The empirical analyses are conducted using matching and fixed-effects regression on a multi-industry dataset from the World Bank. We analyze detailed firm-level information from over 16,000 manufacturing firms across 25 developing economies in South Asia and East Asia. To strengthen causal inference, our analyses address selection bias and unobserved heterogeneity. Results: Our results indicate that the adoption of foreign technology by developing economy manufacturing firms has a substantial short-run disruptive effect on firm operations with productivity growth declining by 4.5 percentage points in these firms relative to comparable firms that do not use foreign technology licensing. We find that formal workforce training programs attenuate the negative relationship between technology licensing and productivity growth. However, infrastructural constraints in the external business environment amplify this negative relationship. Intriguingly, our results suggest that corruption in the firm's external environment acts as an “efficient grease,” attenuating the negative impact of technology licensing on productivity growth. Managerial Implications: Our results provide compelling evidence regarding the disruptive effects of technology licensing on productivity growth in the short run. Furthermore, these results offer insights for manufacturing firms and policymakers in developing economies on how to mitigate these negative effects.

Supplier's capacity investment strategy with factoring finance

Sufficient cash flow and an appropriate capital structure are foundational for the smooth operations of firms. Factoring finance provides an efficient solution for suppliers to fill capital gaps and ensure normal production. Factoring can be provided through either external or internal finance, which are both examined in this study, via factor-led factoring or retailer-led factoring. This study discusses the value of factoring finance to supply chain participants who exhibit loss aversion. Using a game-theoretic approach and equilibrium analysis, we find in each of the factoring schemes that the supplier may choose one of the three following strategies: Strategy N with no liability; Strategy P with partial liability; and Strategy F with full liability. This choice depends primarily on the financing rate and the supplier's degree of loss aversion. The choice among these strategies also affects the relationship between the retailer's order quantity and the supplier's capacity investment. We find that suppliers with low loss aversion prefer retailer-led factoring and that suppliers with high loss aversion have more incentives to adopt factor-led factoring. The loss-averse supplier is more likely to implement Strategy F under retailer-led factoring than under factor-led factoring. The loss-averse supplier tends to invest more capacity under factor-led factoring than under retailer-led finance, while the opposite is the case for the loss-neutral supplier. Our study provides guidelines for supply chain participants in their use of factoring finance to enhance their profits when accounting for both the particular factoring scheme and operational behavior.

Network Size and Content Generation on Social Media Platforms

Social media has been increasingly integrated into firm operations. Past literature documented the operational value of the content generated by social media users but paid little attention to the users’ incentives to generate and share content. We fill in the gap by linking a user’s social network to her content contribution. Specifically, we distinguish the role of the followee network (the group of people being followed by the user) from the role of the follower network. When a user follows more people, she may spend more time in consuming content than generating content (the substitution effect); she may gain more conflicting information from her followees, obfuscating her incentives to generate content (the information overload effect). Conversely, gathering more information from her followees may facilitate her own content generation (the information sharing effect). Through different identification strategies using multiple datasets from two influential social media platforms, we find that the effects of followees and followers are asymmetric in signs and different in magnitudes. Most notably, a user generates less content with a larger followee network, especially when she faces more time constraints. Our findings suggest social media platforms and companies leveraging social media in their operations incorporate network analytics to promote their user engagement.

The impact of emission trading schemes on firm competitiveness: Evidence of the mediating effects of firm behaviors from the guangdong ETS

The pilot carbon emission trading scheme in Guangdong Province (GD ETS) of China has fulfilled seven compliance periods, and its potential impact on regulated firms has drawn increasing attention. This article empirically investigated the impact of the ETS on firm behaviors and competitiveness (i.e., cost competitiveness and green competitiveness) by surveying all power firms in the GD ETS. Low-carbon management, carbon asset transactions, and energy saving and emission reduction technology were identified as firm behaviors. The relationships among the ETS, firm behaviors, and firm competitiveness were tested by using bootstrap multiple mediation analyses. The results showed that the GD ETS has a positive impact on firm behaviors. The three examined firm behaviors actually reflect the depth of firm participation in the ETS. The more the firm participates, the greater the mediating effects that the firm behaviors exert on firm competitiveness are. Both carbon asset transactions and energy saving and emission reduction technology have a mediating effect on the relationship between the GD ETS and cost competitiveness, while only the latter mediates the relationship between the GD ETS and green competitiveness. Implications for policy makers and firm operators were discussed.

Financial distress, corporate takeovers and the distress anomaly

PurposeThis paper examines the relation between takeover likelihood and the documented underperformance of distressed company stocks while exploring two competing hypotheses. The failure risk explanation predicts lower returns to distressed firms with high probability of being acquired because the acquisition reduces risk and investors' required return. Conversely, the agency conflicts explanation predicts lower returns when acquisition is unlikely.Design/methodology/approachThe likelihood of receiving a takeover bid is estimated, and portfolio tests explore the underperformance of distressed company stocks relative to non-distressed stocks across varying levels of takeover likelihood. Predictive regressions subsequently examine the relation between distress, takeover exposure and future firm operating performance including how the relation is affected by state anti-takeover laws.FindingsDistressed stocks underperform non-distressed company stocks by economically and statistically significant margins when takeover likelihood is low, yet there is no evidence of underperformance among distressed stocks with moderate or high takeover exposure. Consistent with agency conflicts playing a key role, distressed firms that are disciplined by takeover threats invest more, use more leverage and experience higher future profitability. State-level anti-takeover legislation limits this disciplinary effect, however.Originality/valueThe results show that the well-documented distress anomaly is driven by a subset of distressed firms whose managers face limited pressure from the external takeover market. The evidence casts doubt on the failure risk explanation and suggests that agency conflicts play a key role.

Adaptive stochastic risk estimation of firm operating profit

This paper presents an adaptive stochastic approach to model and estimate the risk measures of the operating profit of a non-financial business. On the one hand, exogenous financial market variables specific to a country, including foreign exchange, interest, and inflation rates, are stochastically modeled via ARCH/GARCH, Vasicek, and regime-switching mean-reverting processes, respectively. Then, the dependency among all financial variables is captured via a residual Student-t copula. On the other hand, as opposed to traditional business planning whereby a few discrete base/best/worst-case scenarios are developed through a limited number of fixed models, nine distinct revenue and five non-revenue models, including ARIMA, principal component analysis (PCA), and principal component regression (PCR) are introduced to be adaptively selected to calculate the operating profit of a business. Finally, the stochastic exogenous financial market and operating profit model of the business are integrated to estimate various risk measures, including the CVaR, of the operating profit. The paper concludes with a case study on the adaptive generation of a stochastic business operating model and estimation of risk measures of the operating profit of a sample, publicly-traded corporation.

Audit firm operating leverage and pricing strategy: Evidence from lowballing in audit industry

Using a unique set of Korean data for the years 2004–2013, we show that audit firms’ operating leverage is related to lowballing and audit quality. To capture audit firms’ operating leverage, we estimate audit hour elasticity from a regression of changes in logged audit hours on changes in logged audit fees for all audit clients of each audit firm. We find that audit firms with higher audit hour elasticity are more likely to discount fees for new clients (i.e., more lowballing). Further, we find that the relation is more salient when benefits of lowballing is expected to be greater, i.e., in the voluntary auditor rotation regime compared with the mandatory rotation regime. However, we find no evidence suggesting that audit quality of auditors with low operating leverage is compromised due to lowballing. Overall, our findings suggest that audit firms with more flexible production structure have a greater ability to implement pricing strategy even without sacrificing production quality.

Crime against Businesses: Temporal Stability of Hot Spots in Mexicali, Mexico

In developing countries, crime is a serious problem that affects the operation and viability of firms. Offenses such as vandalism, robbery, and theft raise the operating costs of firms and imposes on them indirect costs. The literature on spatial analysis of crime is vast; however, relatively little research has addressed business crime, especially in developing countries’ cities. Spatial and temporal analysis of crime concentration represents a basic input for the design and implementation of appropriate prevention and control strategies. This article explores the spatial concentration and stability of thefts committed against commercial establishments in the city of Mexicali, Mexico, from 2009 to 2011 using the Gini coefficient, Lorenz curve, and decile maps. Results revealed that thefts were highly concentrated in a small percentage of urban basic geostatistical areas. Moreover, a portion of these areas were classified as having the highest deciles of thefts (hot spots) and remained in this group throughout the period. In both cases, the relationship between crime and place was close to the 80/20 rule, or the Pareto principle.

Proactive Value Co-Creation via Structural Ambidexterity: Customer Success Management and the Modularization of Frontline Roles

An increasing number of business-to-business (B2B) service firms have transitioned to recurring revenue-based solutions. These subscription B2B solutions are becoming increasingly common, yet offer challenges for long-term renewal if value is not consistently realized by the customer. To address this concern, customer success (CS) management has emerged. CS management is based on regular proactive action taken by the seller to (a) educate, prepare, and engage customers for value co-creation; (b) demonstrate the value delivered by the solution; and (c) provide a channel for advocacy on behalf of customers within the service-providing firm. Our findings highlight the under-researched topic of CS in B2B settings. Specifically, we propose the CS function and role as a structural alternative to within-person (i.e., cross-functional) ambidexterity and emphasize the ability of a CS focus by service firms to complement existing firm operations in value creation efforts. Our case study analysis provides a multilevel perspective (i.e., executive, functional role employees, and customers) via in-depth interviews that offer unique insights on “how parts of the service-sales system work together.” Overall, CS is growing as a practice that propagates value to the customer via ongoing success with solutions while improving service-firm renewal and growth of subscription business.

Prosecco has another story to tell: the coexistence of multiple knowledge networks in the same value chain

PurposeThis paper aims to analyze how knowledge networks can be configured within a value chain and provide evidence of the coexistence of multiple knowledge networks in the same value chain.Design/methodology/approachThe empirical setting is the Conegliano Valdobbiadene Prosecco Superiore DOCG wine cluster in the Veneto region of Northeast Italy. Data was collected through the administration by telephone of a semi-structured questionnaire to 37 oenologists, sales managers, production managers and owners of bottling companies in the district. The authors used social network analysis tools to map knowledge networks in the Prosecco cluster.FindingsThe results shed light on the importance of singling out knowledge networks in clusters at the value chain level to aid practitioners and researchers in this field. In fact, this research proves the existence of knowledge networks specificities related to the various phases of the production process.Research limitations/implicationsThis study has certain limitations. The most relevant is connected to the choice to limit the analysis to a specific cluster. Future research might extend this type of analysis to multiple clusters in different locations.Practical implicationsThe authors explain that in the cluster they studied, internationalization, as a common objective, might be made easier if firms could establish a more developed sales knowledge network.Social implicationsThe relational approach to value chain enables disentangling specific roles of each actors. The social dimension of the value chain is taken in consideration.Originality/valueThe authors show that a firm operating in the wine industry can have different knowledge networks in the same value chain. This work adds to previous literature on knowledge networks in clusters by shedding light on an important, but still understudied aspect in the cluster functioning. Knowledge diffusion in clusters is not only uneven but is also value chain stage specific. By intersecting literature on knowledge networks, value chain and cluster research, the authors proposed a new perspective of analysis of the wine industry.

A Robust Economic, as Opposed to Industry Classification Nomenclature for Identification and Study of Corporate Diversification

It is well established that Tobin's q is more a measure of average productivity than marginal productivity. This study arrives at two conditions that, satisfied, transform Tobin's q into a robust qualitative - well ordered - measure for firms' marginal productivity. First, in presence of continuity of efficiency of internal capital markets, model predictions show absence of a diversification discount feasibly tatonnes into emergence of a diversification discount. Efficiency of internal capital markets then is shown to be robustly deducible from performance effects of arrival of a beneficial shock in opportunity set of a division of a diversified firm that is characterized by `soft' information. Second, the formal theory establishes necessity of a new economic nomenclature for identification of diversified firms. In presence of the new economic nomenclature, a firm operating in two different industry segments has, conditional on asymptotic equality of segment marginal productivities, classification as a focused firm.

News-Induced Dynamic Networks for Market Signaling: Understanding the Impact of News on Firm Equity Value

Public news provides rich information about firm operations and market dynamics. Learning about firm interactions from news is commonly done by human investors but has not been realized by automatic methods, leading to a research opportunity in market signaling via dynamic firm relations. This study proposes a new text-mining approach to extract cobenefit/counter-benefit networks based on firms’ mutual or conflicting interests in business events. It reveals that the extracted dynamic networks provide additional value in predicting firm equity value over current adopted supply chain and coindustry networks, after controlling for market activities and other traditional indicators from news, such as volume, sentiment, and comentions. In practice, such cobenefit/counter-benefit networks provide good buy and sell signals, which enrich known indicators and support more complex trading strategies in investment and portfolio management. The analysis and visualization of the extracted cobenefit/counter-benefit networks are also useful in understanding the structure of the economy and assessing firm/industry changes in a timelier fashion.

Corporate green bonds

I examine corporate green bonds, whose proceeds finance climate-friendly projects. These bonds have become more prevalent over time, especially in industries where the environment is financially material to firm operations. I show that investors respond positively to the issuance announcement, a response that is stronger for first-time issuers and bonds certified by third parties. The issuers improve their environmental performance post-issuance (i.e., higher environmental ratings and lower CO2 emissions) and experience an increase in ownership by long-term and green investors. Overall, the findings are consistent with a signaling argument—by issuing green bonds, companies credibly signal their commitment toward the environment.

Determining the Operator for the Public Toll Road

After the BOT road operation contract expires, generally, the road will be transferred to the government, and then the government operates the road independently without charging costs from its users. Facing the huge amount of the operation cost, Chinese government tends to continue to charge the road users to guarantee the high quality of road operation. Then, the government will have to decide whether a private firm or government itself would be suitable to operate the road. A model is presented for decision-making through balancing interests between the government and the private firm with an introduction of an intermediate variable, i.e., bidding price. Three scenarios are investigated in the model, including the optimization of government operation, the optimization of private firm operation, and government operation with an improper decision of the intermediate variable. Improper intermediate variable will result in a higher toll charged by the government than by a private firm. The method of avoiding an improper decision is investigated. The result shows that the intermediate variable should be determined to be the government operation cost, based on which the private operator could be chosen, if available. With consideration of the private operator’s profit to be guaranteed by the government, the maximum subsidy should be equal to the minimum private operator’s profit to be disclosed when the contract is signed.

The effectiveness of chief financial officer board membership in improving corporate investment efficiency

The key roles of the Chief Financial Officer (CFO) in firm operating performance, corporate strategic choices, and corporate governance have been increasingly emphasized in recent decades. In this study, we empirically investigate the relation between CFO board membership and corporate investment efficiency to determine whether CFO presence on the board reduces firms’ propensity to over- or underinvest. We find that CFO board membership is significantly associated with a decreased level of corporate over- and underinvestment. Further, the positive effects of CFO board membership on corporate investment efficiency are greater for firms with greater information asymmetries. Last but not least, we find that the improved investment efficiency experienced by firms with CFOs on their boards has a positive effect on the firms’ future performance. Overall, we find that CFO board membership is associated with improved investment efficiency and firms’ future profitability. By documenting the real business impact of CFO board membership on investment efficiency and firms’ future performance, we add bricks to the literature on board composition and how it influences firms’ strategic choices and performance. Our findings suggest that having CFOs on boards could benefit firms’ investment practices, which directly relate to corporate strategic performance.

A Data-Driven Model of a Firm's Operations With Application to Cash Flow Forecasting

The cash flow from the operations of a firm is an endogenous function of the operational variables of the firm -- sales, operating cost, inventory, payables, receivables, etc. Cash flow depends on these variables, and in turn, these variables depend on cash flow and each other through the decisions made by the firm. Consequently, cash flow forecasting is a challenging problem. In this paper, we propose a generalizable and data-driven model of a firm's operations to disentangle this endogeneity and estimate causal impacts among variables. By estimating our model using quarterly public operational and financial data from S&P's Compustat database for 1990-2020, we obtain joint forecasts for cash flows and other operational variables as functions of their lagged values. We show that these joint forecasts are more accurate than those generated from univariate time-series models. Our model also helps quantify the short- and long-run impacts of structural shocks in variables on the entire system, which has applications in assessing the impact of exogenous macroeconomic factors such as recessions (or the COVID-19 pandemic) on future operational performance.

Female Entrepreneurship in the Wine Sector: The Role of Identity in Small and Medium-sized Wineries’ Formation, Growth and Response to Covid-19

The increasing interest in female entrepreneurship advanced our understanding of how psychological and personality traits and the contextual factors surrounding the decision of women to become founders influence their ways of establishing and managing organizations. Recent literature points to the fact that the differences among men and women as founders and leaders of organizations might exist also when major crises happen: in front of radical changes and events that abruptly disrupt the processes and operations of firms, women might manage situations in a peculiar way. From this perspective, Covid-19 represents a fruitful testbed. The onset of the pandemic had social and economic consequences at global level: the outbreak has caused major disruptions in supply chains and shifts in consumption patterns. Relevant current questions are how Covid-19 pandemic has been affecting female entrepreneurs and how resilient they were. The paper looks at women-owned wineries in the Northern part of Italy as an interesting case: indeed, the wine industry has been traditionally a male-dominated industry and it has been heavily impacted by the covid-19 pandemic. Through qualitative research we explore how female wineries were able to change their direction or implement new services. We find that women weigh strategic choices such as using e-commerce with the need to maintain extant relationships, make decisions influenced by the need to preserve communities and rely on peer-networks to provide mutual support.

The relationship between CEO nominal salary and firm operating performance

Nominal salary is a symbolic amount that does not represent economically meaningful compensation. In this study, we document that CEO nominal salary is positively related to a firms' operating and stock performance. Our results stay robust when we address endogeneity issues using the Heckman self-selection two-stage regression and propensity score matching approach. The findings of our study render important implications about CEO compensation structure and how it can align manager incentives with shareholder wealth.

First Come, First Served: The Timing of Government Support and Its Impact on Firms

We study the effects of deploying government capital to firms during crises. Using exogenous variation in the timing of disbursements in the Paycheck Protection Program (PPP), we find that firms receiving PPP loans later become more financially distressed and face reductions in credit supply. These effects are amplified for firms with heightened financial constraints. We also show that firms receiving loans later have lower economic activity using in-store activity and shutdowns. The results are consistent with a direct channel on firm operations and a financing channel. Overall, our findings highlight the role of timely and uninterrupted fiscal support during crises.