Future Operating Performance Research Articles

Competências Técnico-Especializadas Desenvolvidas na Formação do Aluno Especialista em Meteorologia

This study aimed to determine whether the Training Course for Sergeants (CFS) at the School for Specialists in Aeronautics (EEAR) has developed, since 2005, the Meteorology students’ (BMT) skills for the aforemetioned specialized technical field. The professionals who have competence in their area of expertise are able to add values, knowledge and skills to solve both daily and unusual situations. Thus, this research sought to focus on the curriculum structure of the course, on the view of the instructor about their teaching practice, on the view of the undergraduate student about their training and future operational performance, and on the view of the Meteorologist officer about the sergeant received during the considered period. The result revealed by the survey showed that the CFS BMT has developed, since the considered period, the students’ competence to do the job expected from the sergeants after their training.

The Role of Managerial Ability in Bribery and Operational Performance: Evidence from FCPA Violations

ABSTRACT This study examines factors influencing bribery activities that violate the United States’ Foreign Corrupt Practices Act (FCPA) of 1977 and assesses the operational consequences of such activities. Leveraging the managerial power approach and supported by the Peter Principle, we investigate how managerial ability associates with bribery. The results suggest that bribery occurs in firms overseen by managers of reasonably high ability, but the highest ability managers deter such corrupt practices. We also find that bribery substitutes for managerial ability in the pursuit of sales goals and that bribery negates the positive impact of managerial ability on future operational performance. Cross-sectional tests indicate these nonlinear results are most pronounced among firms with Big 4 auditors and that FCPA violations are associated with the purpose of sale generation. Data availability: Data are available from the public sources cited in the text. JEL Classifications: M41.

Exploring the predictive ability of cost asymmetry on bankruptcy

This study explores whether cost asymmetry affects bankruptcy predictions. Cost asymmetry, driven by adjustment costs, empire-building behaviours, and managerial optimism, can reduce resource availability, liquidity, and earnings predictability, thereby increasing the risk of liquidity issues and potential bankruptcy. High cost asymmetry implies additional financing needs due to idle resources, which are less likely (or more costly) to be covered by retained earnings or capital market funds. Furthermore, elevated cost stickiness driven by intense empire-building consumes valuable resources and signals weaker governance and auditing efficiency, while increased managerial optimism heightens the risk to future operating performance. Using a sample of US publicly listed firms over the period 1990–2020, we provide empirical evidence that the level of cost asymmetry is incrementally useful for bankruptcy prediction. The fundamental factors of cost asymmetry, including adjustment costs and managerial incentives, reinforce its predictive ability to corporate bankruptcy. Additional robustness tests confirm our empirical results across (i) fluctuations in sales revenue, (ii) the effects of financial constraints on cost asymmetry, (iii) managerial and firm-specific characteristics, and (iv) propensity score-based partitioned samples.

Does it matter to be a part of the sustainability index?

ABSTRACT We study how companies’ sustainability performance affects their future operational and financial performance. Using firms’ inclusion in the FTSE4Good index series as an indicator of sustainability performance, a quasi-natural experiment shows that sustainability has a beneficial effect on firms’ long-term financial performance. Our findings show a notable rise in the companies’ profitability following their addition to the sustainability index. Additionally, companies that are part of the sustainability index are considered to have higher value compared to firms that are not part of a sustainability benchmark.

Braveheart: On the divergence of recommendations between normal and star analysts

This paper examines how conflicting recommendations from star analysts and normal analysts predict a firm's future stock price and operating performance. We find that when normal analysts issue bold negative recommendations that contradict the views of star analysts, firms that receive such negative recommendations experience worse stock returns and deteriorating fundamental performance over the following two years. Our study provides new insights into the disclosure of private information by financial analysts.

Balance Sheet Debt Covenants and Seasoned Equity Offerings

Synopsis The research problem This study examined the effect of having debt contracts that contain balance sheet covenants on the decision to make seasoned equity offerings (SEOs). Motivation Prior studies examined the determinants of equity issuance without considering private debt contracts that contain balance sheet covenants. Generally, firms are not restricted from stock issuance when they have financial debt covenants. This might motivate firms to make SEOs when they are more susceptible to balance sheet debt covenant violations. Making SEOs increases firms’ equity capitals in the short term and, therefore, has the direct effect of improving balance sheet covenants in the current period. This effect motivated this study to examine whether firms are more likely to conduct SEOs when their debt contracts include more-restrictive balance sheet covenants. The test hypothesis The hypothesis of the study is in the null form, which states that balance sheet covenant restrictiveness is unrelated to the probability of conducting SEOs. Target population The target population includes shareholders, debtholders, and firm managers. Adopted methodology Panel data estimation was used, specifically, the fixed effects model. Analyses The empirical analysis was conducted on a unique sample of UK listed firms with private debt covenants that is hand-collected from annual reports. Equity issuance in the sample is based on private placements, which are a common type of SEO in the UK. The restrictiveness of balance sheet-based covenants is defined as the number of balance sheet covenants in a loan contract or the tightness of net worth covenant slack. Findings The results show that balance sheet covenant restrictiveness is positively associated with the probability of conducting SEOs through private placements. The baseline result is robust to the application of a number of the controls often used in the literature, including cash shortage, the use of balance sheet covenants in the previous loan contract, earnings management, and the quality of external governance. It is also robust to excluding the financial crisis period and addressing potential endogeneity concerns using a propensity score-matching procedure. Additionally, further analysis provides some evidence that equity issuance by firms with more-restrictive balance sheet covenants is negatively associated with future operating performance, suggesting that these firms may not efficiently use the raised capital.

Does management tone matter in information disclosure? Evidence from IPO online roadshows in the SSE STAR market

This paper explores whether management tone in IPO online roadshows in the SSE STAR Market matters in information disclosure. We apply bag-of-words and machine learning methods to construct proxies for management tone, respectively. After conducting a series of empirical analyses, we find that management tone is positively associated with first-day stock returns and future operating performance after IPO. In additional analyses, we provide evidence that the information role played by management tone is transitory and that stock price reversals exist. Then, we document that investor sentiment has a mediating effect on the relationship between management tone and first-day stock returns after IPO. Finally, we demonstrate that compared with forward-looking statements, historical statements in management response texts provide more valuable information. Our research findings confirm that the management tone in IPO online roadshows plays an important information role, despite dramatic changes in information disclosure and stock offering systems in the SSE STAR Market.

Do vocal cues matter in information disclosure? Evidence from IPO online roadshows in the SSE STAR market

In this study, we investigate whether vocal cues expressed by management in IPO online roadshows in the SSE STAR Market play an information role. Using deep learning techniques, we classify the emotional tendencies of vocal cues in IPO online roadshows and construct quantitative proxy variables. After a series of empirical analyses, we find that vocal emotions are positively associated with first-day stock returns after IPO. In addition, we find that vocal emotions have predictive power for future operating performance after IPO. Our findings still hold after a series of robustness checks. Through additional analyses, we provide evidence that information content in the prospectus and investor sentiment play moderating and mediating roles, respectively, in the relationship between vocal emotions and the first-day stock returns after IPO. Moreover, we find that the vocal emotions expressed in the presentation section and the management tone in the Q&A section develop synergistic effects. Finally, we find that the information role played by vocal emotions exhibits timeliness. Our findings elucidate the information role of vocal cues and highlight the importance of IPO online roadshows in the SSE STAR Market.

Labor skill and accounting conservatism

We examine the role of labor market frictions in shaping firms’ accounting policies. We find that firms’ reliance on high-skill labor is negatively related to accounting conservatism, presumably because higher labor adjustment costs make conservative accounting policies more costly. Cross-sectional tests further support the notion that labor adjustment costs are the main driver for the negative relation between labor skill and accounting conservatism. Specifically, the negative relation is more pronounced when a firm i) operates in more competitive industries, ii) has a higher voluntary employee turnover rate, and iii) is more financially constrained. Finally, we show that the positive implication of accounting conservatism for future operating performance and cost of debt is weaker for firms requiring high labor skill, providing plausible explanations for a negative relation between labor skill and accounting conservatism. Collectively, we provide novel evidence on the relation between labor force heterogeneity and accounting conservatism.

Improving financial performance through corporate governance management: empirical evidence from listed service firms in Nigeria

This study focused on corporate governance and financial performance of parastatals in Nigeria. Five (5) banks were selected which are First Bank Plc, United Bank of Africa Plc, Guarantee Trust Bank Plc, Zenith Bank Plc and Fidelity Bank Plc. The data obtained to test and validate the hypotheses were from secondary sources concerning the variables of interest. However, the data generated are as follows; 2015 – 2022 (8 years) financial statements of five sampled banks which provided information about the variables tested and discussed. The data analysis revealed that measures of financial performance (ROA, BOD & BS), recorded means and standard deviations of 0.021966, 13.8, 13.8 and 0.0136177, 2.988868, 2.988868 respectively. The low standard deviation recorded by each of the measures of financial performance suggests that the return on asset of the respective sampled banks, members of their board of directors and board size have proximity with their respective average values. The respective minimum values recorded for ROA, BOD and BS are 0.0025847, 2 and 2; whereas the maximum values were 0.0561668, 19 and 19 respectively. This implies that the minimum of all the measures is not below 0.0561668 and the maximum did not exceed 19. It is concluded that Board composition which entails Board of Directors and Board Size has no significant effect of the financial performance of firms. The study recommended that efforts to improve corporate governance should focus on the value of the stock ownership of board members, since it is positively related to both future operating performance and to the probability of disciplinary management turnover in poorly performing banks.

Global Diversification, Real Earnings Management, and Future Performance: Evidence from Korea

ABSTRACT Research has generally focused on demonstrating real earnings management (REM) stemming from managerial opportunism using the agency framework. Examining a sample of firms on the Korea Composite Stock Price Index from 2011 to 2019, we explore the benefits of REM. Empirical results show a positive relationship between corporate globalization and the extent of REM, and corporate globalization mitigates the negative relationship between REM and future (operating and market) performance, observed only in firms with a low incentive to engage in REM for zero earnings. Global firms with more operational flexibility may strategically utilize REM to avoid temporary crises and perform better in the future.

Brand affiliation and the hotel asset market

Brand affiliation represents a signal about the future operating performance of a hotel that reduces information asymmetries between hotel buyers and sellers. However, information asymmetries vary across property-level and locational characteristics of hotels. We hypothesize that hotel brand affiliation as a signal is most valuable to investors when information asymmetries are higher due to hotel characteristics such as a lower-tier hotel class, suburban location, or poorer building condition. Using a sample of 23,323 hotel transactions from 1986 to 2021, we provide evidence that branded hotels with characteristics indicating higher information asymmetries achieve a higher transaction price and shorter marketing time than similar independent hotels. Transaction price and marketing time do not differ between branded and independent hotels with characteristics indicating lower information asymmetries.

A Simple Approach to Better Distinguish Real Earnings Manipulation from Strategy Changes*

ABSTRACTResearchers typically infer real earnings management when a firm's operating and investing activities differ from industry norms. A significant problem with classifying deviations from industry averages as myopic earnings management is that companies can change their operating and investing decisions for strategic business reasons rather than to mislead stakeholders. Using principal components analysis, we systematically evaluate existing measures and develop a comprehensive real activities measure to better capture earnings manipulation. Our measure reflects (i) deviations from industry averages across multiple activities and (ii) other signals of manipulation. This approach is promising because, although there are many sources of abnormal activities, manipulation is more likely the cause when managers engage in multiple income‐increasing abnormal activities that coincide with other signals that indicate an elevated risk of manipulation. This simple approach results in a metric that associates negatively with future operating performance and earnings persistence, yields high‐power tests, and captures manipulation reasonably well across most life‐cycle stages. Importantly, this approach performs better than the standard real earnings management metrics across all dimensions. Specifically, it generates the expected reduction in future earnings and reduced earnings persistence in 82% of the tests compared to 36% and 46% in common alternatives. Also, because this innovation does not require a long time‐series or rely on future period realizations for classification, it can be useful in more research settings than other recent innovations in the literature.

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.

Economic consequences of bargain purchase gains under ASC 805: evidence from banking industry

ABSTRACT I examine whether bargain purchase gains (previously known as negative goodwill) reported under FASB’s Accounting Standards Codification 805, Business Combinations (ASC 805) in FDIC-assisted transactions represent economic gains to the acquiring banks and thereby qualify as part of banks’ Tier 1 capital. In a sample of 135 publicly-held U.S. banks that acquired failed banks in the period January 2009-April 2012, I find that bargain purchase gains are positively associated with acquirers’ future stock market and operating performance. Also, bargain purchase gains appear to capture expected future gains, including and beyond the FDIC subsidy. Specifically, the component of bargain purchase gains that is less likely related to the FDIC subsidy is positively associated with acquirers’ future short-run and long-run stock market performance and accounting operating performance. Finally, the factors, such as agency problem, internal control strength, and corporate governance strength, that affect the reliability of financial reporting matter for the reliability of bargain purchase gain estimation. Overall, the results imply that fair value accounting as implemented under ASC 805 enables bargain purchase gains to reliably reflect expected future economic gains, rather than measurement error or agency problem.

Are Investment Opportunities Associated with Dividend Reduction?: Evidence from Korea

Purpose This paper examines associations among firm dividend reductions, investment opportunities(IOS), and share repurchases(SRP). Also, I examine the association between these factors and future operating performance. Design/Methodology/Approach This paper uses un-balanced panel data of 21,453 firm-year observations of non-financial Korean listed firms from 2003 to 2018. Findings Empirical evidence suggests that firms with higher IOS are more likely to reduce dividends to retain internally generated capital to prevent sub-optimal investments, while SRPs have a substitution effect on dividends in the dividend reducing context, and the effect is more pronounced with a less flexible SRP method. Also, dividend reductions associated with higher IOS are likely followed by enhanced operating performance. Additional tests suggest that the signaling effect of SRP varies according to the IOS among dividend-reducing entities over the long-run horizon. Research Implications Dividend reductions have been considered a ‘last resort’ for corporate managers, and thus manager reluctance to reduce dividends is taken for granted. However, there are firms reducing dividends despite good operating performance. This study provides a clue of such a phenomenon in practice.

The Marketing Capability Premium

Abstract Marketing capability refers to a firm’s ability to optimally deploy and integrate different marketing inputs to achieve high sales at low cost. This paper examines whether the value of marketing capability is incorporated into stock returns. High-level marketing capability predicts better future operating performance and stock returns. A marketing capability-based long-short portfolio strategy earns an average annual return of 5.16%, a substantial portion of which is earned over subsequent earnings announcements. The return predictability is stronger in stocks with higher valuation uncertainty and lower investor attention. Investors underreact to the value-relevant, but difficult to process, information embedded in marketing capability. (JEL G12, G14, G10, M30) 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.

Propping today, tunnelling tomorrow: expropriation motives and firm performance

The purpose of this paper is to examine propping and tunnelling in group firms which have booked losses and performed badly in past years. We offer partial explanation to the group survival puzzle; that under institutional motivations such as avoidance of delisting and refinancing risks, group firms witness tunnelling subsequent to propping and thereby expropriate public shareholders in the long run. Our results confirm that tunnelling happens typically after prior propping up. Additionally, the paper analyses the effect of propping and tunnelling on current and future operating performance respectively. The findings exhibit that propping affects the current year's operating performance of the firm positively, while tunnelling affects the performance in future years. The findings of this study will help public shareholders to better assess risk and return while investing in group firms. Also, the study can be used as a reference by regulatory bodies when making policies to curb such expropriating activities.

Managerial Over‐Optimism and Research and Development Investment: Evidence from Korean Initial Public Offering Firms*

AbstractExamining 1114 Korean firms between 2001 and 2015, we find that positive discretionary research and development expenditures in initial public offering years positively relate to future investment but do not significantly affect future performance. Thus, managerial optimism rather than signaling likely drives over‐investment. High‐tech firms generally over‐invest more, and those that over‐invest are more likely to delist within 5 years. Future research and development expenditures are positively associated with future operating and stock performance only for high‐tech firms with low discretionary research and development expenditures around initial public offerings. Successful initial public offerings may create over‐confidence, resulting in inefficient expenditures.

Accounting-based downside risk and expected stock returns: Evidence from China

We document that earnings downside risk contains information on firms' future operating performance and is positively associated with expected stock returns in Chinese stock markets, and the return predictability of earning downside risk mainly comes from its accrual downside risk component. The pricing of earnings downside risk is especially evident among firms with more transparent information environment and stronger governance efficacy, such as large firms, non-high-tech firms, old firms, and firms with high analyst coverage. Lastly, we show that aggregated earnings downside risk and its components at the market level are all significantly and positively associated with subsequent stock market returns, which is consistent with the notion that the accounting-based downside risk measures contain information about future macroeconomic conditions.