Future Sales Growth Research Articles

Socially Responsible Corporate Customers

Corporate customers are an important stakeholder in global supply chains. We employ several unique international databases to test whether socially responsible corporate customers can infuse similar socially responsible business behavior in suppliers. Our findings suggest a unilateral effect on CSR only from customers to suppliers, an evidence further supported by exogenous variation in customers' close-call CSR proposals and by product scandals. Customers exert influence on suppliers' CSR through positive assortative matching and their decision making process. Enhanced collaborative CSR efforts help improve operational efficiency and firm valuation of both customers and suppliers but increase only the customers' future sales growth.

Leases and Over-investment

What factors enhance investment efficiency in leased assets, and what incentives give rise to over-investments? If firms over-invest in leases, what economic consequences arise? We develop a model of expected investment in leased assets, and use the residuals from the model as proxies for inefficient investments. We find that, in contrast to investments in capital expenditures, leasing appears to be a mechanism for over-investment even among firms with high reporting quality and negative free cash flows. Examining economic consequences, we predict and find that over-investments in leased assets trigger increasing future sales growth but declining future earnings growth for as long as three years ahead. We also find a negative relation with contemporaneous stock returns, suggesting investors view over-investments in leases as value destructive. Finally, despite negative earnings and returns consequences, we find that over-investments in leases are associated with higher CEO compensation driven primarily by future sales growth. Our results should inform investors, board members, and researchers interested in investment efficiency, corporate governance, and leases.

Surveying Business Uncertainty

We elicit subjective probability distributions from business executives about their own-firm outcomes at a one-year look-ahead horizon. In terms of question design, our key innovation is to let survey respondents freely select support points and probabilities in five-point distributions over future sales growth, employment, and investment. In terms of data collection, we develop and field a new monthly panel Survey of Business Uncertainty. The SBU began in 2014 and now covers about 1,750 firms drawn from all 50 states, every major nonfarm industry, and a range of firm sizes. We find three key results. First, firm-level growth expectations are highly predictive of realized growth rates. Second, subjective uncertainty is highly predictive of forecast errors and the magnitude of future forecast revisions. Third, subjective uncertainty rises with the firm’s absolute growth rate in the previous year and the extent of recent news about its growth prospects. We aggregate over firm-level forecast distributions to construct monthly indices of business expectations (first moment) and uncertainty (second moment) for the U.S. private sector.

An empirical analysis of the curvilinear relationship between slack and firm performance

This study performs an in-depth analysis of the curvilinear relationship between slack and future firm performance. Using a sample of US firms, we analyze the influence of three indicators of absorbed and unabsorbed slack on the two commonest dimensions of firm performance: profitability and sales growth. Although the relationship between most slack variables and firm performance is curvilinear, the inflection points (for both maximums and minimums) lie mainly outside the distribution range of the slack variables and, consequently, the curvilinear relationships between slack and performance are, in fact, neither U-shaped nor inverted U-shaped. Therefore, the influence of slack on performance can be positive or negative: linear for certain variables, but concave/convex for most variables analyzed in our study. An additional important finding is that the influence of slack on future profitability is usually the opposite of its influence on future sales growth: negative and positive, respectively, for absorbed slack; positive and negative, respectively, for financial slack. Results are robust to different lagged periods of the independent variables. The effects of equity and cash slacks on future performance are mainly negative, especially for longer time periods.

The Costs of Cutting Advertising to Manage Earnings: Evidence from the Survival of Newly Launched Trademarks

Using the newly available U.S. trademark dataset to measure the lifespan of new brands, we find that new brands’ survival rate significantly declines following managers’ myopic cuts in marketing budgets. This evidence is consistent with concerns raised by marketing managers that firms’ brand innovation is being sacrificed in order to manage reported earnings to meet short-term earnings targets. The observed effect is more pronounced for firms in industries where more resources are devoted to advertising expenditures and in more reputation-sensitive industries. Additional analyses show that the survival rate of new brands has a significantly positive impact on future sales growth and profitability, confirming the value-relevance of brand innovation and our findings about the detrimental effects of earnings management .

Non-additivity in Accounting Valuation: Theory and Applications

This paper has three objectives. First, to introduce a theoretical solution to the issue of non-additivity between assets in place, relying on an accounting-based valuation approach. Second, to explain how such an approach can be implemented empirically by measuring synergies between assets. Third, to present the properties of this non-additive valuation technique. We use Choquet capacities, that is, non-additive aggregation operators, to measure the interactions between assets and apply our methodology to a sample of US firms from the capital goods industry. To operationalize our approach we examine the relationships between synergies—captured by Choquet capacities—and the market-to-book ratio (proxying for growth options), and show how interactions between assets are consistently linked to a firm’s market-to-book ratio. We also measure firm-specific productive efficiency relative to the industry and firm size. For large firms, efficiency, as defined by our approach, is positively associated with higher future operating cash flows. For small firms, efficiency is positively associated with higher future sales growth. We document that the non-additive approach appears to be better able to identify expected relationships between efficiency and future performance than a simpler approach based on the market-to-book ratio.

Real earnings management or “just business”

PurposeThe purpose of this study is to refine what is characterized as real earnings management. Research on real earnings management (REM) has expressed concerns that firms deviating from normal business practices may endure a negative impact on future performance. Not all studies have, however, found a negative impact of REM on future performance. As a consequence, a new stream of research is emerging that examines whether actions that would mechanically be identified as REM are truly earnings management or are simply efficient business activities. The authors further this stream of inquiry by identifying factors, i.e. restructurings and expectations of future sales growth, that can be useful in making a distinction between earnings management and “just business”.Design/methodology/approachTo measure REM, the authors rely on two of the proxies of Roychowdhury (2006), abnormal discretionary expenses and abnormal production costs, and regress interactions of these with measures of restructurings and expectations of future sales growth, on future performance.FindingsThe authors find that when they control for restructurings, reductions in discretionary expenses that would ordinarily be indicative of REM are instead associated with improved future return-on-assets and security returns. They further find that when they control for future sales growth, overproduction is also associated with improved return on sales as it is with future increases in cost of goods sold.Originality/valueTogether, the results may explain the contradictory results presented in prior research with respect to the impact of REM on future performance – that is, some of what has been identified as REM in prior studies may, in fact, be “just business”.

Country-level institutions, firm value, and the role of corporate social responsibility initiatives

Drawing on transaction cost theories and the resource-based view of a firm, we posit that the value of corporate social responsibility (CSR) initiatives is greater in countries where an absence of market-supporting institutions increases transaction costs and limits access to resources. Using a large sample of 11,672 firm-year observations representing 2445 unique firms from 53 countries during 2003–2010 and controlling for firm-level unobservable heterogeneity, we find supportive evidence that CSR is more positively related to firm value in countries with weaker market institutions. We also provide evidence on the channels through which CSR initiatives reduce transaction costs. We find that CSR is associated with improved access to financing in countries with weaker equity and credit markets, greater investment and lower default risk in countries with more limited business freedom, and longer trade credit period and higher future sales growth in countries with weaker legal institutions. Our findings provide new insights on non-market mechanisms such as CSR through which firms can compensate for institutional voids.

How Best to Communicate Intangible Resources on Websites to Inform Corporate‐Growth Reputation of Small Entrepreneurial Businesses

Identifying disclosure communication signals as narrative, visual, and numerical, and measuring them using two methods, this study investigates how best the intangible resources can be used to communicate future‐period corporate‐growth reputation, measured as future sales growth, of the fastest growing small companies in Australia over a continuous three‐year period. Using insights from resource‐based theory and signaling theories, and generating data using content analysis from 276 companies, this study finds that communication signals when combined rather than in isolation are predictors of future‐period corporate‐growth reputation. The study provides additional support for current‐period corporate‐growth reputation mediating intangible resource signals in predicting future‐period corporate‐growth reputation.

Resident Networks and Firm Trade

We demonstrate that simply by using the ethnic makeup surrounding a firm’s location, we can predict, on average, which trade links are valuable for firms. Using customs and port authority data on the international shipments of all U.S. publicly-traded firms, we show that firms are significantly more likely to trade with countries that have a large resident population near their firm headquarters. We use the formation of World War II Japanese Internment Camps to isolate exogenous shocks to local ethnic populations, and identify a causal link between local networks and firm trade. Firms that exploit their local networks (strategic traders) see significant increases in future sales growth and profitability, and outperform other importers and exporters by 5%-7% per year in risk-adjusted stock returns. In sum, our results document a surprisingly large impact of immigrants’ economic role as conduits of information for firms in their new countries.

Do Nonexecutive Employees Have Valuable Information? Evidence from Employee Stock Purchase Plans

Using novel data on employee stock purchase plans (ESPPs), we show that aggregate purchases of company stock by lower-level employees predict future stock returns. Firms in the top quartile of ESPP purchases outperform those in the bottom quartile by 10% in the year after purchase. The relation between ESPP purchases and future stock returns is stronger for firms with high information asymmetry. Furthermore, we find that high ESPP purchases are associated with a lower likelihood of breaks in strings of consecutive earnings increases, as well as higher future sales growth and more innovation. These findings support the hypothesis that lower-level employees have information about future firm performance. We examine and reject a number of alternative explanations. Our results have implications for firms using employees as a source of capital, accounting issues related to expensing of equity-based compensation, and disclosure policy. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2015.2226 . This paper was accepted by Wei Jiang, finance.

Mini West Virginias: Corporations as Government Dependents

Much like states that rely on government spending, certain firms rely on the government for a substantial share of their revenues. Exploiting the statutory requirement that forces firms to list the identities of their major customers, we identify and examine the set of firms whose major customers are listed as government entities. We employ an identification strategy that exploits government contract bid protests in order to identify the causal impact of government sales on future firm outcomes, and find that government-linked firms invest less in physical and intellectual capital, and have lower future sales growth.

An Analysis of Firms' Self-Reported Anticorruption Efforts

ABSTRACT We use Transparency International's ratings of self-reported anticorruption efforts to analyze factors underlying the ratings. Our tests examine whether these disclosures reflect firms' real efforts to combat corruption or are cheap talk. We find that the ratings are related to enforcement and monitoring, country and industry corruption risk, and governance variables. Controlling for these effects and other ratings determinants, we find that firms with lower residual ratings have higher subsequent citations in corruption news events. They also report higher future sales growth and show a negative relation between profitability change and sales growth in high corruption geographic segments, but not in low corruption segments. The net effect on valuation from sales growth and changes in profitability is close to zero. The findings are robust to a number of sensitivity tests, including analysis of disclosures for a larger sample over multiple years. We conclude that, on average, firms' disclosures signal real efforts to combat corruption.

Country-Level Institutions, Firm Value, and the Role of Corporate Social Responsibility Initiatives

Drawing on transaction cost theories and the resource-based view of a firm, we posit that the value of corporate social responsibility (CSR) initiatives is greater in countries where an absence of market-supporting institutions increases transaction costs and limits access to resources. Using a large sample of 11,672 firm-year observations representing 2,445 unique firms from 53 countries during 2003-2010 and controlling for firm-level unobservable heterogeneity, we find supportive evidence that CSR is more positively related to firm value in countries with weaker market institutions. We also provide evidence on the channels through which CSR initiatives reduce transaction costs. We find that CSR is associated with improved access to financing in countries with weaker equity and credit markets, greater investment and lower default risk in countries with more limited business freedom, and longer trade credit period and higher future sales growth in countries with weaker legal institutions. Our findings provide new insights on non-market mechanisms such as CSR through which firms can compensate for institutional voids.

Organisation capital and sticky behaviour of selling, general and administrative expenses

This study investigates how a firm's view towards intangible-related economic sacrifices affects the stickiness of selling, general and administrative (SG&A) expenses. The sticky cost phenomenon is an alternative pattern of cost behaviour which attributes an explicit role to managerial deliberate resource-commitment decisions. We speculate that, in a sales decline, firms with high levels of intangible assets increase the slack of their unutilised resources more than firms with low levels of intangible assets. This is because a high level of intangible investments increases the level of adjustment costs and drives managers to shape more optimistic expectations regarding whether future sales growth will absorb the slack of unutilised resources. The level of organisation capital is selected as the primary variable of a firm's intensity of intangible investments in order to examine the relation between the cost behaviour of SG&A expenses and intangible investments. The data sample consists of 55,769 firm-year observations of US listed firms for the period 1979–2009. Our empirical findings suggest that in the case of firms with high (low) organisation capital, SG&A expenses exhibit sticky (anti-sticky) cost behaviour.

Corporate Lobbying and CEO Pay

This study examines the agency costs of corporate lobbying by exploring the relation between lobbying and excess CEO compensation. We show that CEOs of firms engaged in lobbying earn significantly greater compensation levels compared to CEOs in non-lobbying firms, after controlling for standard economic determinants of pay. The relation between lobbying and CEO pay increases with the intensity of firms’ lobbying. Although lobbying is positively associated future sales growth, we find no evidence suggesting it culminates in shareholder wealth creation. Additional tests reveal that for a subset of firms with available data, governance attributes mediate the relation between lobbying and firms’ decision to lobby. Lastly, a difference-in-difference, propensity-score matched analysis suggests significant increases in CEO pay levels around firms’ initial lobbying engagements. Overall, we conclude that corporate lobbying introduces agency costs borne by shareholders.

Satisfaction as a predictor of future performance: A replication

Since the introduction of the Net Promoter concept there has been a vivid and ongoing debate among academics and practitioners about the performance of the Net Promoter Score (NPS) in comparison to other customer metrics, such as customer satisfaction, to predict company growth rates. We report results from a study using data from customers and firms in the Netherlands on the relationship between different satisfaction and loyalty metrics as well as the NPS with sales revenue growth, gross margins and net operating cash flows. We find that all metrics perform equally well in predicting current gross margins and current sales revenue growth and equally poor for predicting future sales growth and gross margins as well as current and future net cash flows. The NPS is neither superior nor inferior to other metrics. Taken together, our study suggests that the predictive capability of customer metrics, such as NPS, for future company growth rates is limited.

Causes and Consequences of Firms' Self-Reported Anticorruption Efforts

We use Transparency International’s ratings of self-reported anticorruption efforts for 480 corporations to analyze factors underlying the ratings. Our tests examine whether these forms of disclosure reflect firms’ real efforts to combat corruption or are cheap talk. We find that firms with high ratings are domiciled in countries with low corruption ratings and strong anticorruption enforcement, operate in high corruption risk industries, have recently faced a corruption enforcement action, employ a Big Four audit firm, and have a higher percentage of independent directors. Controlling for these effects and other determinants, we find that firms with lower residual ratings have relatively higher subsequent media allegations of corruption. They also report higher future sales growth and show a negative relation between profitability change and sales growth in high corruption geographic segments. The net effect on valuation from sales growth and changes in profitability is close to zero. Given this evidence, we conclude that, on average, firms’ self-reported anticorruption efforts signal real efforts to combat corruption and are not merely cheap talk.

The Relationship Between Bankruptcy Risk and Growth for Non-Listed Firms

We investigate the relationship between bankruptcy risk and expected future sales growth for Norwegian non-listed rms for the period 1988-2007. We nd that rms with high bankruptcy risk also have high expected future growth. Financial ratios characterizing rms with high bankruptcy risk also characterize rms with high future expected growth. Small rms, rms with low levels of equity and retained earnings, rms with low protability and low levels of sales per unit of capital, have all higher expected future growth rates than other rms. These ndings suggest a tradeo between the upside potential of high growth and the downside risk of bankruptcy.

What Drives Corporate Charitable Contributions, Market Forces, Government Influences, or Political Goodwill? Evidence from China

This study examines the determinants and consequences of corporate charitable contributions in China. Using a large sample of listed firms from 2001 to 2006, we find that firms with political connections are more likely to make charitable contributions. Firms owned by local governments are more likely to make charitable contributions than firms owned by the central government. Furthermore, we find that resource constraints and industry competition cannot explain corporate philanthropy in China. We document a positive association between charitable contributions and future firm performance but find no evidence that charitable contributions affect future sales growth. Further analysis indicates that firms making charitable contributions received more bank loans and government subsidies. The overall results are consistent with listed companies in China using charitable contributions to build the political goodwill with the government.