Future Firm Performance Research Articles

Does Disclosure of Advertising Spending Help Investors and Analysts?

Publicly listed firms have discretion to disclose (or not) advertising spending in their annual (10-K) reports. The disclosure of advertising spending can provide valuable information because advertising is a leading indicator of future performance. However, estimates of advertising spending are available from data providers, arguably mitigating the need for its formal disclosure. This article argues that firms’ disclosure of advertising spending provides more complete and public information and therefore lowers investor uncertainty about future firm performance (idiosyncratic risk). Empirical analyses show that the effect is largely driven by the negative effect of disclosure of advertising spending on analyst uncertainty. Consistent with agency theory, the negative effect of the disclosure of advertising spending on analyst uncertainty is stronger for firms with more financial resources, firms with lower disclosure quality, and firms that are in more competitive industries. Additional analyses show that the disclosure of advertising spending has a significant positive effect on firm value in specific sectors. These results, therefore, identify an avenue for chief marketing officers to play a greater role in managing investor relations. In addition, they suggest strong merit for the Securities and Exchange Commission and the Financial Accounting Standards Board to reconsider current regulations governing advertising spending disclosure.

Capital Expenditure and Future Firm Performance: Evidence from Firms Listed on the Stock Exchange of Thailand

Abstract: Purpose – Capital expenditure reflects a company's investment in long-term assets expected to generate value for shareholders over time. Such expenses mostly expect to improve a company's future performance. This research aims to explore the relationship between capital expenditure and future firm performance. Design/methodology/approach –A sample (n=475) of registered companies listed on the stock exchange of Thai (SET) from 2000-2016 was selected. The time period selected for this research allows the researchers to analyze the relationship during the period of economic growth and stability. Secondary data was harvested from the Thomson Reuters Datastream database. Findings – A regression analysis showed a negative relationship between capital expenditure and future firm performance, as measured by return on assets (ROA) and dividends. Notably, this negative relationship was found to be statistically significant across the board, first for all companies and second for a unique subset of larger companies. Originality/value - Such findings go against general expectations. Subsequently, the study has implications for general practice, investment, and the academe.In particular, it sheds light on the potential impact of agency on investment expenses. Practically, registered SET companies can use this insight to make informed investment decisions; investors to make investment decisions, and lenders to make lending decisions. Overall, this research provides value for various stakeholders across financial exchanges.

Costs of voting and firm performance: Evidence from RegTech adoption in Chinese listed firms

Employing the 2014 mandatory adoption of online shareholder voting in China, we show that the reduction of voting costs through online voting is positively related to participation in shareholder meetings and future firm performance. Our mechanism analysis suggests that the improved firm performance is mainly driven by the enhanced governance role played by informed investors and institutional investors. Further analysis shows that online shareholder voting makes the firms more attractive to mutual fund managers who are far away from the firms. Moreover, we find that the improved firm performance is concentrated in firms with low controlling shareholder ownership, and that online shareholder voting is associated with an increased likelihood of vetoing proposals and lower tunneling.

Cash shortfalls in IPO firms

We find that most IPO firms will run out of cash soon if they did not receive proceeds from IPOs. The cash shortfalls are not caused by increases in capital expenditure, R&D, M&A, or debt repayment and persist during the 5 years after IPO. Negative net cash flows help explain the persistent cash shortfalls. These results are consistent with the funding horizon theory. IPO firms with more initial cash shortfalls also have lower cash flows in the next 5 years, suggesting that initial cash shortfalls can be used to predict the future operating performance of IPO firms.

The mediating role of corporate social responsibility in corporate governance and firm performance

This study investigates the mediating effect of corporate social responsibility on the relationship between corporate governance and firm performance and whether this effect varies between family and non-family businesses. Based on a cross-national sample of the 500 largest family businesses matched to a non-family business sample from 2009 to 2018, it has been found that corporate social responsibility partially mediates the relationship between corporate governance and firm performance in the full sample. Further, the mediation effect is stronger in family businesses than in non-family businesses. This supports the conjecture that in their pursuit of socioemotional wealth, family businesses are more likely to implement corporate governance to ensure corporate social responsibility, thus enhancing future firm performance. These findings provide insights for all stakeholders, from business owners to regulators and policymakers, aiming to improve and sustain business performance.

Textual analysis of the annual report and corporate performance: evidence from China

Purpose This paper aims to examine the relationship between the readability of annual reports and corporate performance in Chinese listed firms. Design/methodology/approach This research examined the annual report readability factors of Chinese listed companies by using a textual analysis method using Python to extract the text from the annual reports, convert it into numerical form to facilitate statistical analysis and then merge the results with data from the Chinese stock market to explain the impact on corporate performance and predict future earnings in the Chinese financial markets from 2008 to 2021. Findings Study findings indicate that firms with better financial reporting readability are more profitable, incur lower agency costs and have low earnings in the Chinese stock markets when readability is low (i.e. more complexity and length of annual reports). It was also found that when a listed company has a good performance, it prefers to use a short space to explain its operating and financial status. More generally, the means of the report length are short, and accounting terms are used less frequently; in the case of a poor company, the annual report is particularly long and accounting terms are more frequently used. In the context of the COVID-19 crisis, this study served as a proxy measure of returns prior to the announcement of the COVID-19 pandemic. In addition, an instrumental variable approach is used, which helps results to remain robust and control for fixed effects and potential endogeneity problems. Research limitations/implications Although this study’s results cannot be generalised globally because of their limited scope, they can still be generalised across non-English speaking countries. Thus, future cross-country research is encouraged to examine the textual analysis of financial reports across those countries. Practical implications This study conveys two messages to investors and policymakers within the Chinese market. First, investors ought to pay greater attention to the nonfinancial information contained in annual reports to improve the accuracy of their predictions regarding future firm performance. Second, Chinese policymakers are encouraged to instate a policy for the use of plain English in annual reports to make them more readable by international investors. Originality/value This study contributes to the paucity of research that examines English-written annual reports in non-English speaking countries by examining the readability of annual reports in the Chinese market.

Skin in the Game: Operating Growth, Firm Performance, and Future Stock Returns

AbstractPrior research documents that asset growth is negatively associated with future firm performance. In contrast, we show that growth financed by product market stakeholders (i.e., “operating growth”) is positively associated with future firm performance. Investors and security analysts underestimate the positive effects of operating growth on future performance, resulting in return predictability and overly pessimistic earnings forecasts for firms with high operating growth. Future stock returns largely concentrate around subsequent earnings announcements with declining magnitudes, consistent with the error-in-expectation explanation. Results from cross-sectional tests further support the hypothesis that operating growth signals high future performance but investors underreact to it.

Hidden Gems: Do market participants respond to performance expectations revealed in compensation disclosures?

We find that a new compensation disclosure item on expected payouts from performance-based stock grants reveals unique information regarding future firm performance. Extracting inferred performance expectations from the disclosures, we find that firms disclosing the highest expected grant payout significantly outperform in ROA, Q, sales growth, and profit margin over the next two years, while those disclosing the lowest expected payout underperform. The embedded information is not captured by other information channels, such as managerial earnings guidance, 10-K sentiment, insider selling activities, unexplained CEO pay, and analyst forecasts. Investors and analysts do not fully incorporate the information and are later surprised around earnings announcement days. A portfolio that buys firms with the highest performance expectation and shorts firms with the lowest expectation earns significantly positive abnormal returns. Our findings suggest that the enhanced compensation disclosure contains valuable information, but investors underreact to information that is difficult to collect and process.

Trust and monitoring

We show that in countries with more societal trust shareholders cast fewer votes at shareholder meetings and are more supportive of management proposals. This result is confirmed by instrumental variable regressions. It also holds at the U.S.-county level and for voting by U.S. institutional investors. Lower monitoring via voting relates less negatively to future firm performance in high-trust countries, suggesting that managers do not exploit greater discretion when trust is high. We also find a negative relation between trust and bond spreads. Our evidence supports theory arguing that trust substitutes for monitoring and has implications for investors’ optimal monitoring effort.

Reputational damage and name changes: Impact of financial crimes

AbstractResearch QuestionThis study examines the relation between reputational issues and name‐change decisions among US financial firms. I examine if financial firm name changes are related to reputational concerns and whether or not financial firms try to distance themselves from misconduct by adopting a new name.Research Findings/InsightsI document that firms adopt a new name to disassociate themselves from reputational concerns. I find that investors react negatively to name‐change announcements for firms with reputational issues. My findings also suggest significant corporate upheaval following misconduct, such as dampening performance.Theoretical/Academic ImplicationsMy research is the first to investigate market reactions to name changes in the US financial industry. My paper utilizes several unique hand‐collected datasets of corporate wrongdoings, violations, frauds, and other financial crimes to measure firm reputation and test whether name changes are related to reputational concerns.Practitioner/Policy ImplicationsI not only measure pre‐event misconducts for name changes but also analyze the future firm performance following financial misrepresentations. My paper adds to the growing literature of firm reputation, brand image, and firm value.

Report Users' Perceived Sentiments of Key Audit Matters and Firm Performance: Evidence from a Deep Learning-Based Natural Language Processing Approach

ABSTRACTWe investigate the associations between the sentiment report users perceive in key audit matters (KAMs) and current and future firm performance. We also investigate the validity of the bidirectional encoder representations from transformers (BERT) model for automatically extracting KAM sentiment in Taiwanese listed firms' audit reports. Positive associations between KAM sentiment and current and next-year firm performances, measured by Tobin's Q, ROA, and ROE, are discovered based on a two-year sample of 1,606 firm–year observations, including manually labeled sentiment data in 2017 and BERT-extracted sentiment data in 2018. However, the evidence of the positive association between KAM sentiment and current firm market performance (Tobin's Q) is weaker in 2017 than in 2018 statistically. Our results suggest that KAM sentiment reflects future firm performance and support the application of the BERT deep learning approach for textual mining. This study has implications for regulators, practitioners, and academics.JEL Classifications: D83; L25; M42.

Tax Avoidance and Corporate Investments

This study examines the association between firms’ tax avoidance and long-term investments. We find that tax avoidance firms make greater investment than nontax avoidance firms, and that the positive association between tax avoidance and investments holds both for firms that are financially constrained, and therefore ex-ante likely to underinvest, and for financially unconstrained firms that are ex-ante more likely to overinvest. Our results further show that CEO equity incentives and governance strength exert an incremental effect on investment decisions of tax avoidance firms. In additional analyses, we demonstrate that tax avoidance firms’ investments are associated with improved future firm performance especially when those firms are ex-ante more likely to underinvest. For tax avoidance firms that are ex-ante more likely to overinvest, current investments are associated with declined future firm performance. Tax avoidance firms have higher (lower) investment efficiency in terms of improved (declined) operating profitability in the post-investment period when they have lower (higher) CEO equity incentives and stronger (weaker) governance. Overall, our results shed light on efficiency in utilizing the available cash through tax avoidance in long-term investments that might create shareholder value for a group of financially constrained firms but diminish shareholder value for another group of financially unconstrained firms.

Natural disasters and CSR: Evidence from China

Using detailed natural disaster data and a sample of Chinese listed firms over the period 2011–2019, we examine the link between natural disasters and firms' corporate social responsibility (CSR) performance. We find that both the presence of a severe natural disaster and the number of disaster categories are significantly associated with higher CSR activities in the affected area. Next, we explore why firms are motivated to increase their CSR engagement in the disaster area. Our empirical evidence shows that state ownership, political connections, and institutional ownership are the main driving forces that spur CSR activities in the disaster area. Moreover, large firms and firms with high financial constraints are more motivated to increase their immediate CSR activities following natural disasters. We also find that CSR activities during the disaster period reward firms with better future accounting and stock market performance than those in the non-disaster period. Overall, our findings suggest that state ownership, political connections, institutional ownership, and future firm performance create incentives for firms to enhance CSR investments following natural disasters.

Does board turnover enhance firm performance? A contingency approach

AbstractResearch Question/IssueDoes board turnover improve future firm performance? Our research investigates whether and when board turnover is beneficial from an information processing perspective.Research Findings/InsightsDrawing from information processing theory, we propose and test a novel model that explains how magnitude of board turnover influences future firm performance, and what pre‐turnover board characteristics mitigate the negative impact of board turnover on future firm performance. We find that board turnover negatively influences future firm performance, and pre‐turnover board meeting frequency, board job‐related diversity, CEO power relative to the board, and board tenure moderate this negative impact.Theoretical/Academic ImplicationsPast findings of the impact of board turnover are limited and equivocal, suggesting the need to conduct more systematic investigation to explain post‐turnover firm performance and to consider boundary conditions that affect this relationship. Building on information processing theory, we explain that the negative impact of board turnover on future firm performance is due to disruption of the board's information elaboration ability. Furthermore, we advance the novel perspective that boards which developed higher information elaboration ability prior to turnover can better mitigate the disruption in information processing resulting from board turnover.Practitioner/Policy ImplicationsThere are costs to board turnover that should be considered seriously. Our study demonstrates that higher magnitude of board turnover leads to poorer subsequent firm performance. The importance of pre‐turnover board's information elaboration ability implies that board turnover should be planned and actively managed—just like CEO succession planning—to minimize information processing disruption from turnover.

Cost asymmetry around seasoned equity offerings

We examine the asymmetric cost behaviour of firms during seasoned equity offerings (SEOs). Using a sample of US firms that issued SEOs over the period 1995–2020, we find a reduction in cost asymmetry for SEO firms. We also demonstrate that managerial resource adjustment decisions are driven by stronger external monitoring instead of managerial entrenchment. We find that competent managers make efficient resource adjustments, but they are able to do so when they operate under excess capacity. Further, we find that SEOs retain slack resources when demand declines in periods following the SEO. Finally, we find that the lower cost asymmetry during SEOs improves future firm performance. Our results are robust to several categories of cost, different measures of firm performance and different model specifications. This study contributes to the literature by documenting managerial cost management decisions around SEOs.

Getting Personal: A Deep Learning Artifact for Text-Based Measurement of Personality

Analysts, managers, and policymakers are interested in predictive analytics capable of offering better foresight. It is generally accepted that in forecasting scenarios involving organizational policies or consumer decision making, personal characteristics, including personality, may be an important predictor of downstream outcomes. The inclusion of personality features in forecasting models has been hindered by the fact that traditional measurement mechanisms are often infeasible. Text-based personality detection has garnered attention due to the public availability of digital textual traces, however state-of-the-art models proposed by IBM, Google, Facebook, and academic research are not accurate enough to be used for downstream real-world forecasting tasks. We propose a novel text-based personality measurement approach that improves detection of personality dimensions by 10–20 percentage points relative to the best existing methods developed in industry and academia. Using case studies in the finance and health domains, we show that more accurate text-based personality detection can translate into significant improvements in downstream applications such as forecasting future firm performance or predicting pandemic infection rates. Our findings have important implications for managers focused on enabling, producing, or consuming predictive analytics for enhanced agility in decision making.

Does directors' and officers' liability insurance induce empire building? Evidence from corporate labor investment

This study examines whether directors' and officers' (D&O) insurance affects corporate employment decision-making. Using a 2006–2018 sample of Chinese public firms, we find that firms purchasing D&O insurance exhibit lower labor investment efficiency, reflected mainly in over-hiring. The findings are strengthened by a set of additional robustness tests to mitigate endogeneity concerns and selection bias. The negative relation between D&O insurance and labor investment efficiency is more pronounced in firms with weak corporate governance, a low proportion of female executives, high labor intensity and low legal risks. Further analysis suggests that inefficient labor investment leads to worse future firm performance. This study provides the first empirical evidence that D&O insurance increases managerial empire building tendencies via over-investment in labor, which, in turn, is detrimental to shareholder value.

Is R&D Really That Special? A Fixed‐Cost Explanation for the Empirical Patterns of R&D Firms†

ABSTRACTI propose an explanation for the positive relation between R&D, future earnings, and future stock returns based on the fixed‐cost qualities of R&D. If R&D is relatively fixed over short horizons, demand shocks realized by some R&D firms will push these firms into R&D intensity levels that are suboptimal as common scale proxies—market equity, assets, and sales—respond more quickly to demand shocks than R&D. In response, R&D firms realizing negative demand shocks reduce future expenses and capital expenditures, producing higher future profitability on lower sales growth. Consistent with the fixed‐cost hypothesis, I find the higher future profits of high R&D firms are explained by cost cutting, not revenue growth. Collectively, the restructuring of cost and capital structures of the subset of high R&D firms realizing demand shocks explains the future profit and investment patterns of R&D firms, while the fixed‐cost qualities of R&D seem to explain patterns in future stock returns. My results have implications for literatures that examine how decisions on R&D investment levels affect future firm performance, growth, and stock returns.

Future Firm Performance, Corporate Governance, Information Asymmetry and Insider Trading - A Systematic Literature Review using PRISMA

Future Firm Performance, Corporate Governance, Information Asymmetry and Insider Trading - A Systematic Literature Review using PRISMA

Future firm performance, corporate governance, information asymmetry and insider trading – a systematic literature review using PRISMA

Future firm performance, corporate governance, information asymmetry and insider trading – a systematic literature review using PRISMA