German Firms Research Articles

Software investment and organizational change: Evidence from panel data

AbstractTechnological investment is a key managerial decision to make by firms. In recent years, firms increasingly invest in software systems to support big data analytics, digital transformation, and AI, which however do not always pay off. Recent research suggests that software availability may influence entry, at the industry level, by increasing labor productivity, reducing scaling costs, and/or facilitating demand forecasting. However, how these mechanisms through which firms' software investment may affect organizations by inducing various changes is unclear. Insights into these mechanisms require microdata at the firm level over years. We construct a unique panel dataset from 13,335 German firms across industry sectors in 2011–2017 to conduct a firm‐level econometric analysis. We find that, on average, firms' software investment improves demand forecasting but, interestingly, may reduce labor productivity and slow down scaling up. We further propose several organizational contexts in which software investment can be more beneficial to remedy such challenges. Labor productivity is improved only if firms reorganize labor work when making software investment, and scaling costs may be reduced if firms facilitate learning through investments in both software and human capital development. Putting together, this research contributes a new understanding of organizational changes induced by software investment and what contingency factors can make software investment more beneficial in the organizational contexts, to guide managers to make value‐increasing decisions.

Analyzing the strategy–performance relationship in Germany – can we still use the common strategic frameworks?

PurposeThis study examines the strategy–performance relationship within publicly traded German firms. Strategic management literature provides several strategic frameworks that offer guidance on promising strategies. However, given major changes, such as globalization, managers wonder whether strategic frameworks are still applicable.Design/methodology/approachThe authors employ principal component analysis (PCA) to measure competitive strategy and analyze a sample of 6,037 firm-years among 651 firms between 2000 and 2019.FindingsWhile the authors find evidence for the existence of efficiency-based strategies, differentiation-based strategies and mixed strategies, only differentiation-based strategies are positively related to performance.Originality/valueThe study’s results contribute to the discourse on the strategy–performance relationship, as they provide insights into promising strategies that are of interest to researchers and practitioners. Further, the authors introduce a new measure of competitive strategy based on PCA.

The Anticipation of Mandatory Audit Firm Rotation and Audit Quality

ABSTRACTResearchers and regulators regularly debate whether mandatory audit firm rotation affects audit quality. Theoretically, rotation might improve auditor independence but impair competence. In 2014, the European Commission mandated audit firm rotation for public-interest entities, starting from 2020 for nonfinancial firms. However, any auditor change in the transition period could already be interpreted in light of the upcoming mandatory rotation regime, consistent with anecdotal evidence on such interpretations. These changes provide a unique setting because auditors have strong incentives to build a reputation for high-quality audits when choosing to participate in the market for rotations during the transition period. Using a balanced panel of 287 German firms and data from 2014 through 2019, we hypothesize and find lower discretionary accruals, abnormal working capital accruals, and total accruals in the first year after rotation. This effect is restricted to smaller public companies.Data Availability: The data are from public sources and are available from the third author upon written request.JEL Classifications: M42; M48.

How Does CEO Decision Style Influence Firm Performance? The Mediating Role of Speed and Innovativeness in New Product Development

AbstractAlthough chief executive officers (CEOs) are the primary decision‐makers in their firms, there has been little research on how CEOs' decision styles affect firm performance. This study explores the relationships between firm performance and two key dimensions of CEO decision style, namely the use of heuristics and decision standards. We conceptualize the speed and innovativeness of new product development (NPD) as mediators in these relationships. An empirical analysis of 1046 German firms indicates that CEOs' use of heuristics may lead to higher NPD speed and stronger firm performance. In addition, higher decision standards, i.e., a stronger tendency to make the best decisions possible, among CEOs may promote higher NPD speed, NPD innovativeness, and firm performance but may also lead to less use of heuristics. Our findings underscore the relevance of CEO decision styles for firm performance and NPD, contribute to the debate on the rationality of heuristics, and conceptually broaden the role of decision standards in decision‐making.

Dividend taxation and the ownership structure of private firms

This paper examines the effect of dividend taxation on the ownership structure of private firms. I exploit a German dividend tax increase that only affects corporate shareholders owning a minority stake. Using data on private German firms and their shareholders, I find that corporate shareholders reduce their minority stakes in firms after the dividend tax reform. This result is in line with the notion that, because minority shareholders do not have sufficient decision-making power to influence the payout policy, they can only react to a dividend tax increase by selling their shares. This effect is larger when the affected minority shareholders face high dividend tax costs. However, I find a smaller effect when the benefits of the minority stakes are highly relevant for the firm and the affected shareholders, suggesting that non-tax factors mute the response to dividend taxes. In addition, I find that the largest shareholder of the firm buys the minority stake, resulting in greater ownership concentration. These findings extend the prior literature that finds no effect of dividend taxes on the ownership structure of private firms.

Heroes of the Green Room – How able successors revitalize and reinvent family firms

ABSTRACT Drawing on contingency and upper echelon theories, this study conceptualizes family firm CEO succession as a special window of opportunity for the new generation to reinvent and rejuvenate the firm and restore the environment-organization fit that had often deteriorated pre-succession. We argue that CEO-related human capital enables successors to identify and amend misfits, allowing them to re-chart an organization’s course to enhanced performance, especially when the misfit is marked by a turnaround situation. Based on a quantitative analysis of 804 German firms and 31 qualitative interviews, we find support for these coherences and contribute to contingency and upper echelon theories.

Identities in transition: Audit recruits and the German reunification

This paper studies the identity transitions of East German audit recruits during the fundamental ideological, economic, and societal change brought about by the reunification of Germany in 1990. Integrating the identity work literature with key concepts from Pierre Bourdieu and Erving Goffman, we build on semi-structured interviews with two groups of recruits—university graduates and former state auditors—to explore and theorize the marked differences observed in these recruits' transition processes. In line with wider processes of territorial stigmatization, we argue that the West German audit firms pragmatically instrumentalized their local personnel, seeking to deploy them without intending to integrate them into the profession. In turn, the audit recruits met with this exertion of symbolic violence by managing a ‘spoiled identity’. The university graduates found it easier to recognize and accumulate legitimate forms of capital, thereby submitting themselves to the inculcation of the profession's socialization process, which ultimately yielded their institution into the profession. In contrast, the former state auditors' local knowledge and access to client networks provided immediately useful capital to the West German firms, which, however, sought to retain a status differential vis-à-vis these recruits. As a result of such strategies of condescension, the former state auditors maintained key aspects of their identity as a salient part of their self-conception. We further highlight the role of the local audit offices in the recruits' transition processes, as they evolved from flexible spaces, which allowed for experimentation and improvisation, into more structured units. This process embedded professional values and practices, thereby creating localized office identities.

Information frictions among firms and households

Using surveys of German firms and households, we document novel stylized facts about the extent of information frictions among the two groups. First, firms’ expectations about macroeconomic variables are closer to expert forecasts and less dispersed than households’, consistent with higher information frictions among households. Second, the degree of dispersion and the distance from expert forecasts varies more across groups of households than across groups of firms. Third, firms update their policy rate expectations less than households when provided with an expert forecast, consistent with firms holding stronger priors. Our results have implications for modeling choices, macroeconomic dynamics, and policies.

The Brexit Effect on German Firms

The Brexit Effect on German Firms

Who is to Suffer? Quantifying the Impact of Sanctions on German Firms

Who is to Suffer? Quantifying the Impact of Sanctions on German Firms

Characteristics of firm misconduct and effects on capital market reactions

This article replicates earlier literature on capital market reactions to firm misconduct with rarely used Continental European data, after the financial crisis, and combines characteristics that previous literature has analyzed separately. We hand-collect press articles on 96 illegal misconducts of German firms between 2010 and 2019 and use the content of those articles to determine the misconduct type, misconduct characteristics, and information characteristics. Short-term cumulative abnormal returns (CARs) proxy for market reactions. We hypothesize and find negative market reactions that are stronger when the misconduct harms connected (vs. third) parties and when it primarily benefits the firm (vs. the offending individual). For information characteristics, we only find support for the prediction that markets react more negatively to confirmed misconduct (vs. suspicions). Some results are sensitive to including both misconduct and information characteristics or excluding financial statement fraud. Earlier research rarely tests for such sensitivity. Our research shows that market reactions to illegal misconduct are robust overall, but robust common determinants of effect strength are difficult to establish. These insights are of relevance for researchers when using capital market reactions to study misconduct implications and when referencing earlier research in this area.

The boundary conditions for growth: Exploring the non-linear relationship between organic and acquisitive growth and profitability

The nature of the relationship between growth and profitability remains inconclusive, despite prior research. To contribute to a better understanding of the growth-profitability relationship, we examine its non-linear character. We achieve this by deconstructing growth into organic and acquisitive modes, and by theorizing how the particular costs and benefits of each mode affect the profitability, which we measure as return on assets. Furthermore, we propose that the interaction of these two modes can also affect profitability. By studying these relationships with a panel data set of established German firms during a 13-year period, we uncover an inverted U-shaped relationship between growth and profitability that is mainly driven by acquisitive growth. These decreasing returns at higher levels of acquisitive growth are related to the higher internal costs of managing acquisitions. Consistent with our logic, we find that organic growth has a declining positive profitability effect. The interaction of both growth modes also shows that increasing acquisitive growth negatively impacts the positive effect of organic growth on profitability.

Trust and opportunism as paradoxical tension: Implications for achieving sustainability in buyer-supplier relationships

While trust and opportunism were traditionally considered as the opposite ends of a continuum, when considered through the lens of paradox theory, these two could not only coexist, but also have a complementary effect on the achievement of sustainability in buyer-supplier relationships. To examine the combined effects of trust and opportunism, we apply a polynomial regression analysis and the response surface approach using survey data collected from 259 German firms. We find that the trust-opportunism paradox has different impacts on sustainability collaboration and evaluation. Sustainability collaboration thrives under high levels of trust and low levels of opportunism; here, firms can apply a resolution strategy to deal with the paradoxical tension. For sustainability evaluation, trust and opportunism jointly increase sustainability evaluation initially and then it decreases; in this case, a paradox acceptance strategy would be more appropriate. We also find these effects to differ between younger and mature relationships. In younger relationships equal levels of trust and opportunism result in the highest levels of sustainability collaboration. In mature relationships, the shadows of the past and the future seem to provide sufficient assurance to the buyer that sustainability collaboration can be sustained even in the presence of minor acts of opportunism.

Auditor‐provided non‐audit services and perceived audit quality: Evidence from the cost of equity and debt capital

There is an ongoing debate among regulators and researchers about concerns that the provision of non‐audit services (NAS) to audit clients may impair audit quality by reduced independence. In this context, there can be different perspectives on audit quality. Given recent regulatory changes in the European Union (EU) aimed to improve investor confidence in audited financial statements, it is critical to understand the association of NAS and audit quality perceptions by investors before and after the regulation. We investigate whether NAS affect shareholder and lender perceptions of audit quality, measured by the cost of debt and equity capital. For a sample of German firms, we find significant positive associations of NAS with both cost of debt and cost of equity. Other assurance and consultancy services drive this effect. We do not find this effect in the pre‐regulation period, but in the transition period when the regulation was passed but NAS restriction did not yet apply. In the post‐regulation period, it only persists for lenders. Thus, the EU regulation may have increased (or inadequately created) independence concerns for shareholders and lenders and curbed these concerns for shareholders only.

Wage gap and stock returns: Do investors dislike pay inequality?

Recent research shows that a high wage-gap between managers and workers identifies better-performing firms, but the stock market does not seem to price this information. In this paper, we show that not all investors neglect pay inequality. Using a unique data set on German firms’ employee compensation, we find that the mispricing of the wage gap is driven by limits to arbitrage. Specifically, some investors seem to bid up low-wage-gap stocks for non-monetary reasons, thus exhibiting a preference for low pay-inequality. The results suggest that firms with equitable pay schemes are rewarded with a lower cost of capital.

Symbolic Shareholder Democracy: Toward a Behavioral Understanding of the Role of Shareholder Voting in CEO Dismissals

We investigate the effect of expressive shareholder dissent voting, in which shareholders use their votes symbolically to express their discontent with management, on subsequent chief executive officer (CEO) dismissals. Using the routine but highly symbolic executive board discharge proposal voted on at the annual shareholder meetings of German firms, we argue that the board of directors understands these votes as a “vote of confidence in management” that challenges the CEO’s mandate to lead the firm. Arguing that board chairs are uniquely positioned to take up the stance of a steward of the firm and its leadership, we examine how independent and family board chairs moderate the board’s response to expressive voting dissent. Using a sample of German public firms over the period 2008–2015, we find that expressive voting dissent increases the chance of CEO dismissal increasingly with the level of dissent expressed. Contrary to prevailing agency theoretical expectations, we do not find that independent chairs are more responsive to expressive voting dissent, nor that this relationship is strengthened by the degree of minority institutional investor ownership of the firm. Consistent with the symbolic perspective on shareholder voting that we seek to develop, however, we find that family chairs are more likely to lead the board to dismiss the CEO due to the intrinsic disvalue they incur from symbolic leadership legitimacy challenges in their firms, and that the positive effect of having a family chair on the dissent induced chance of CEO dismissal is strengthened by the level of family ownership in the firm.Funding: A University of Illinois at Chicago Summer Research Grant is gratefully acknowledged for S. Sauerwald.

FDI and onshore job stability: Upgrades, downgrades, and separations in multinationals

We use linked employer–employee data to estimate the impact of firms’ foreign direct investment (FDI) into a low-wage country on workers’ job stability in a high-wage country. We are the first to consider internal (i.e., within-firm) job transitions. Specifically, we examine the impact of German firms’ FDI into the Czech Republic on the likelihood of onshore employees up- or downgrading to occupations that are more or less intensive in analytical and interactive tasks. To do so, we match firms with similar investing probabilities. We use this sample to estimate proportional hazards models to retrieve the dynamic effects on workers. We find that FDI increases the average likelihood of upgrades and downgrades by 17% and 19%, respectively. These effects are the strongest for jobs with low shares of nonroutine and interactive tasks, and they increase over time. They become substantial two years after the investment and reach 32%–46% and 35%–48%, respectively. FDI does not increase the hazard of worker–firm separations. Our results highlight the importance of internal firm restructuring, which enables firms to satisfy their altered domestic labor needs after FDI.

The Impact of Macroeconomic Risk Factors, the Adoption of Financial Derivatives on Working Capital Management, and Firm Performance

This study examines macroeconomic risk factors to investigate how they affect working capital management (WCM) and, ultimately, firm performance. Additionally, we examine the effect of credit default swaps (CDSs) as a countermeasure for WCM in the presence of volatile macroeconomic risk factors. In doing so, we use firm-level data from the United States, the United Kingdom, Germany, and China between 2006 and 2020. The two-step system generalized method of moments (GMM) estimation method is employed to analyze the study′s objectives. Results show that US, German, and Chinese firms are more conservative, while UK firms are more aggressive in maintaining WCM during economic policy uncertainty. Conversely, foreign exchange risks drive the USA, the UK, and Chinese firms to lengthen their cash conversion cycle level due to fear of value loss, while the opposite is true for German firms. Nevertheless, following CDS adoption, firms are more confident in working capital (WC) investment. CDSs eliminate the need for delayed receivables and payables and increased inventory as safety stock for US, UK, and Chinese firms. Finally, CDS interaction shows that USA, UK, and German firms may boost their profitability by increasing account receivable periods to create more sales, reducing account payable periods, and holding more inventories to expedite sales operations. Alternatively, CDSs suggest an optimal level of WC investment for Chinese firms. As a result, governments should consider CDS adoption in policy decisions when business performance sinks due to macroeconomic volatility.

Markets or unions? De‐unionisation and German firms' provision of flexible working‐time policies from 2002 to 2016

AbstractWorking‐time regimes structure time‐use and (gender) inequality, but processes shaping the availability of flexible working‐hours arrangements remain poorly understood. This study adopts a longitudinal perspective to investigate change in the provision of long‐ and short‐term working‐time accounts by firms in Germany between 2002 and 2016. In this period, flexibility policies became more common, but union coverage declined, motivating the question: Are unions losing their influence on working‐time arrangements? And if so, is availability increasingly determined by firms' agency? Dualization theory implies that while unions have a narrowing sphere of influence, their collective bargaining power remains intact. By contrast, the classical assumption is that reduced coverage leads to a reduced bargaining power. A third line of argument holds that where unions' influence declines, firms' agency driven by factors such as competition for skilled employees or the need to retain female employees becomes more important. Using the German IAB Establishment Panel this study decomposes the overall expansion of flexibility policies in parts accruing to changes in firms' behaviour and changes in industrial relations and labour market conditions. The study finds that increased competition for employees contributed to better working conditions. The penalty for firms employing a high share of women decreased slightly, but not for the most legally protected policies. Erosion of collective bargaining is found to have a small negative impact on working‐time arrangements. Overall, the findings confirm that despite a diminished sphere of influence, union's bargaining power remained relatively stable.

State-dependent or time-dependent pricing? New evidence from a monthly firm-level survey: 1980–2017

We examine the relative importance of time and state dependence in the price-setting decisions of firms using a monthly panel of German firms over the period 1980–2017. We propose a refined version of time dependence by introducing different hazard functions for price increases and decreases. We find three sets of results. First, time dependence is much more important for price setting than what the previous literature has found. Second, price decreases can be well explained by time dependence alone. Price increases are best predicted by the interaction of time-dependent and firm-specific state factors. Third, time dependence for price increases and decreases look completely different from each other. Our empirical results support the notion that theoretical models should integrate both time and state dependence.