High Growth Opportunities Research Articles

Pilot CEOs and trade credit

By using a pilot license as a proxy for the sensation-seeking personality trait, we examine the relation between sensation-seeking CEOs and trade credit. With a sample of pilot CEOs and non-pilot CEOs from U.S. listed firms from 1993–2016, we find strong evidence that firms led by pilot CEOs are more likely to use trade credit than those led by non-pilot CEOs. The positive relation between pilot CEOs and trade credit is more pronounced for firms with high investment growth opportunities. The results are consistent with our conjecture that firms with pilot CEOs tend to have a higher level of trade credit, especially when they need capital to finance long-term investment activities to satisfy the CEOs’ desire for sensation. Our findings establish a link between a CEO personality trait and trade credit and suggest that this CEO personality trait might be a relevant factor in determining purchaser firms’ use of trade credit.

Expanding Opportunities for Investors and Retirees: Private Equity

In recent years, U.S. companies have raised more equity through private offerings available only to institutional and high-net-worth investors than through initial public offerings (“IPOs”) that are available to the general public. The number of U.S. public companies has also been steadily declining, and private start-up companies are frequently reaching billion-dollar valuations without opening up to the public for investment. In this report, Expanding Opportunities for U.S. Investors and Retirees: Private Equity, we examine whether U.S. policymakers should expand access to investments in private companies through private equity funds. A private equity fund refers to an investment vehicle that invests in the securities of private companies and that is not registered with the Securities and Exchange Commission (“SEC”) as an investment company. Private equity funds include buyout funds that acquire controlling stakes in businesses and venture capital funds that invest in young private companies with high growth opportunities. We find that private equity funds have a well-established performance history that justifies expanding investor access to them. We recommend three ways to do so. First, legislative reforms to expand access to direct investments in private equity funds. Second, SEC reforms to expand access to public closed-end funds that invest in private equity funds. And finally, Department of Labor (“DOL”) reforms to facilitate the ability of 401(k) plans to invest in private equity funds.

Risk management and corporate social responsibility

AbstractResearch SummaryWe introduce an innovative method of identifying the risk‐management benefit of corporate social responsibility (CSR). Option‐implied volatility captures the financial markets' expectations of a firm's future risk, so if CSR is related to risk‐management benefits, it should be related to lower implied volatility. We find that CSR is associated with low implied volatility and that CSR's insurance benefit is larger for firms that have high leverage, growth opportunities, or uncertainty. However, CSR as an insurance mechanism is less beneficial to firms that are already sound (i.e., those that have high market value and good accounting and financial performance). The results reveal the “terms” of a CSR‐as‐insurance contract, confirm that CSR creates risk‐management benefits, and suggest that financial markets price this benefit in economically significant ways.Managerial SummaryWe suggest a practical technique of evaluating a firm's CSR policy. For example, a manager would simply check how a firm's implied volatility changes as its CSR policy changes. Or, the manager can compare a firm's and its comparable firms' implied volatilities to knowhow financial markets perceive the firm's CSR differently. Option implied volatilities could guide a firm to identify proper CSR‐based risk‐management policies because they have the advantage of being ex ante, real‐time, and objectively observable market‐pricing information in identifying the risk‐management benefit of CSR. Our results also illustrate how a financial expert can use the valuable insight of strategic management literature about CSR‐as‐insurance to price derivative contracts.

CDS trading and nonrelationship lending dynamics

We investigate how credit default swaps (CDSs) affect lenders’ incentives to initiate new lending relationships. We predict that CDSs reduce adverse selection that nonrelationship lead arrangers face when competing for loans. Consistently, we find that a loan is more likely to be syndicated by a nonrelationship lead arranger following CDS trading initiation on a borrower’s debt. We also show that borrowers that obtain loans from nonrelationship lead arrangers in the post-CDS trading initiation period are more opaque, in line with the effect of CDSs being more pronounced for borrowers for which adverse selection costs are higher. Further analyses show that, relative to relationship lead arrangers, nonrelationship lead arrangers have lower monitoring incentives in the post-period, as reflected by less restrictive covenants and performance pricing provisions they impose and by the reduced loan shares they retain. Moreover, we find that borrowers of nonrelationship lead arrangers following CDS trading initiation have higher growth opportunities and more volatile operations, consistent with such borrowers benefiting more from weaker restrictions on their activities imposed by lenders. Lastly, lower monitoring incentives of CDS-protected nonrelationship lead arrangers also decrease the propensity of inexperienced participants to join their syndicates. Overall, our findings suggest that CDS trading significantly changes nonrelationship lending dynamics.

Private Inequity: Private Markets and the Death of the Micro-Cap Stock

This paper examines the decline in publicly listed equities in the United States with respect to both the public and private markets. Public equities have halved in count in the U.S. between the mid-1990s and today, with a paucity of small stocks limiting access to high-growth opportunities for common investors. The paper finds that the decrease in listed equities is more likely to be attributable to a lack of new entrants via IPOs than it is to be due to increased de-listing activity via mergers and acquisitions, liquidations, and involuntary de-listing. Furthermore, this shift is shown to be driven by micro-cap stocks, which once drove initial public offering volume. The second half of the paper reviews the role of the private markets in abetting micro-caps’ abstention of the public markets, identifying growth in follow-on funding and secondary liquidity as potential factors for further analysis.

Mandatory Dividend Policy, Growth, Liquidity and Corporate Governance: Evidence from Chile

Chilean publicly listed companies are required by law to pay out a minimum 30% of distributable earnings after taxes as dividends on common stock. The study extends Lintner’s [Lintner, J (1956). Distribution of incomes of corporations among dividend retained earnings and taxes. American Economic Review, 46, 97–113.] model of dividend smoothing and Banerjee [Banerjee, S, VA Gatchev and PA Spindt (2007). Stock market liquidity and firm dividend policy. Journal of Financial and Quantitative Analysis, 42(2), 369–398.] logistic model of the likelihood of a firm paying a dividend to investigate the signaling, liquidity, corporate governance, and information risk-based theories of dividends. The results show that Chilean firms’ excess dividends are smoothed in relation to the prior period level of excess dividends, and lagged earnings do not drive excess dividends even though the mandatory minimum dividend is defined in terms of lagged earnings. This insight establishes that dividend decisions regarding the size of the excess dividend and the likelihood of paying an excess dividend are distinct from the mandatory dividend payment. Additionally, the size of excess dividends and their likelihood are higher at firms with higher growth opportunities, a result consistent with the use of excess dividends as a signaling device. Results also demonstrate that greater transparency is associated with a greater likelihood of paying an excess dividend, but transparency does not drive policy regarding the size of the excess dividend. Moreover, the corporate governance mechanism creditor monitoring influences the size of excess dividends but not the likelihood of paying excess dividends. These results have implications for securities regulators evaluating the pros and cons of a mandatory dividend policy to protect minority shareholders in emerging markets.

(Un)intended consequences? The impact of the 2017 tax cuts and jobs act on shareholder wealth.

We study the stock market reactions to the Tax Cuts and Jobs Act (TCJA), the most significant structural U.S. tax reform in over 30 years. In line with the stated intent of TCJA proponents, we find that the Act benefited highly taxed firms. However, the Act hindered firms with international operations as well as firms with high interest expense and tax losses. Counter to claims that the TCJA would quickly spur economic growth, we find that financially constrained and high growth opportunity firms did not benefit. Rather, market participants anticipate that most of the TCJA's benefits will be passed on to shareholders via higher corporate payouts. We confirm these market expectations by documenting that firms did increase payouts via repurchases after the TCJA, but did not increase their corporate investments.

The impact of product market competition and internal corporate governance on family succession

The paper examines the influence of product market competition and internal corporate governance, and their interaction on family succession. Our data comprises 382 succession events in Taiwanese listed family firms between 1997 and 2016. We find that firms operating in environments of intense product market competition are more likely to select a non-family member as the successor (i.e. non-family succession), as non-family successors are found to improve post-succession firm performance. Our results also indicate that there is a stronger likelihood that firms with controlling families who have a higher level of ownership and higher participation in management will implement family succession; however, this positive association is mitigated in a competitive environment. In contrast, a higher level of related party transactions (RPTs) is associated with more non-family succession, especially in a competitive environment. Moreover, firms with higher RPTs, higher growth opportunities, or in competitive environments are more likely to issue equity after non-family successions, which is consistent with outside successors improve shareholder trust in the firm. This study also documents that product market competition is a new external determinant of family firms' succession decision and links its effect to internal corporate governance.

Do Creditors Have a Say in Corporate Tax Planning? Evidence from a Natural Experiment

I examine corporate tax avoidance through the lens of agency costs of debt by investigating the impact of an exogenous variation in creditor rights resulting from the staggered enactment of anti-recharacterization laws (ARL). Using difference-in-difference approach, I find that strengthening creditor rights leads firms to engage in less nonconforming tax avoidance. The ARL estimate of 0.011 indicates that the treated firms increase their GAAP effective tax rates, on average, by 1.1 percentage points, which amounts to more than a 3 percent increase in the sample median GAAP effective tax rate. This new evidence appears to apply to firms with high growth opportunities, financially unconstrained firms, and those with high institutional ownership. My findings suggest that creditor rights affect corporate tax planning.

Ownership concentration and stock returns: Evidence from family firms in India

Public family firms in India represent an interesting case of relatively high ownership concentration combined with high growth opportunities, less competitive product markets and less developed capital markets. Investigating the relationship between ownership concentration and stock market performance, our initial analysis indicates insignificant average abnormal stock returns at low levels of family holdings but weak positive performance at high levels of ownership in the full sample of family and non-family firms and the family subsample. These aggregate results appear robust to alternative metrics of abnormal performance, controls for founder, descendant, and outside CEOs. Further analysis of subsamples of less and more competitive product markets indicates that while the vast majority of family firms enjoying high growth opportunities in less competitive market environments exhibit poor performance at lower ownership levels, those firms with higher family holdings are associated with significantly positive abnormal returns. However, the relation between family ownership and firm valuation under high growth prospects becomes insignificant for a much smaller fraction of firms facing high product market competition. Overall, our results are consistent with the hypothesis that positive alignment of interest effects offset family entrenchment effects on firm performance at high levels of ownership concentration common in India where most firms face high growth opportunities and less product market competition. These results challenge the evidence in western developed economies marked by relatively weaker growth rates and stronger product market rivalry that the performance of family firms tends to decline at high ownership concentration due to entrenchment.

Estructura de capital, concentración de propiedad y política de dividendos como factores determinantes de problemas de agencia en empresas chilenas

The objective of this paper is to analyze the capital structure, the concentration of property and the policy of dividends as determinants of the problems of agency in Chilean companies. As a measure of agency costs, the asset turnover ratio was used as a benchmark for management efficiency in the use of the company's assets, which is an inverse measure of agency costs.
 
 The results show that a higher level of indebtedness seems to favor the discretional behavior of managers. However, there is also evidence that when the debt is a short-term debt, the divergence of interest decreases between shareholders and managers.
 The concentration of property on the other hand has a non-linear effect on the costs of agency, which means that, first, it acts as a mechanism to attenuate managerial discretion, but when it reaches a certain level, an effect of expropriation of major shareholders over minor shareholders seems to be produced. In relation to the dividend policy, a positive relationship is observed with efficiency in the use of assets, mainly in the presence of high growth opportunities.

The Barriers to High-Growth Enterprises: What Do Businesses in Africa Experience?

This study examines the challenges that micro, small and medium enterprises (MSMEs) face and provide insights on African business environment and entrepreneurial ecosystem. In the context of growth-oriented entrepreneurship, good policies and favourable institutional environments support firms' growth, productivity and development, while adverse formal and informal institutions constrain business development. Secondary data from World Bank Enterprise Survey (WBES) was used to capture barriers to entrepreneurship and high-growth opportunities which include – lack of finance, lack of innovation and technology, low skilled workforce, poor infrastructure, unfavorable regulations and more pervasively corruption. These barriers are evident in the micro, meso and macro environments. These have implications on the unemployment rate, poverty rates and economic growth of the African region.
 Keywords: Micro, Small and Medium Enterprises; Entrepreneurial Ecosystem; African Entrepreneurship; African Business Environments.

Institutional Ownership and Firm Performance under Stakeholder-Oriented Corporate Governance

This study aimed to reveal the role of institutional investors with shareholder-oriented scopes in a stakeholder-oriented economy such as Japan. With financial globalization, the increasing number of institutional shareholders in Japanese corporations enables us to investigate whether their shareholder-oriented perspectives are conducive to taking on effective monitoring roles under stakeholder-oriented corporate governance. This study’s sample included large listed firms of the TOPIX 500 in Japan during 2010-2016. Using 2924 firm-year observations, the effect of institutional investors on firm performance was analyzed to test the role of institutional investors in stakeholder-oriented corporate governance. Our study showed that the monitoring role of institutional shareholders, or foreign shareholders, functions effectively in Japanese corporations. In addition, we showed that the monitoring roles of these are expected to strengthen firms through higher growth opportunities. These results implied that institutional shareholders contribute to enhancing sustainable firm performance and constructing sustainable corporate governance mechanisms in a stakeholder-oriented system.

Competencies of Human Resource Professionals in the Private Sector of Mongolia: A Pair-Designed Investigation and Comparison with the Global Norm

Mongolia is defined as one of the 3G /Global Growth Generators/ countries and is predicted to generate high growth and profitable investment opportunities over the next 30 years due to its growing young generation and natural resource. Even though Mongolia has increasing development in economy and business, very limited numbers of studies have been published to reveal the economic and management situations in this country. To contribute to closing this gap, the main purpose of this study was to understand the management, especially the field of human resources (HR). This sub management field is immature and has a history less than twenty years in Mongolia. In addition, , the researcher examined HR competencies in Mongolia based on the Human Resource Competency Study (HRCS) model 2012 which is composed of six HR competencies namely: strategic positioning, credible activist, capability builder, change champion, HR innovator, and technology proponents. Furthermore, the local HR competency result was compared with global norms which were identified by the RBL group in 2012. The pair design was carried out, and a total of 200 data has complied from both HR managers as well as employees from 50 private companies in Mongolia. Based on the 5-point Likert scale, local competence levels ranged from 3.5 to 3.8. The results of this study showed that local competency levels were lower than the HR global norms.

International Linkage, Bank Financing, and Firm Innovation

In this study, I explore the role of international bank linkages on firm innovation. I find robust evidence that borrowing from international-linked banks leads firms to become more innovative, in terms of both quantity and quality of innovation outcomes. Firms experience larger innovation gains borrowing more intensively from familiar international-linked banks and have higher growth opportunities in general. I argue that international bank linkages help connected banks share information and screen firms with higher innovation qualities, allowing additional credits available to higher-quality firms in conducting more innovation activities. Overall, the results shed light on the real effects of international bank linkages and the underlying determinants of innovations.

Sectoral Analysis of Factors Influencing Dividend Policy: Case of an Emerging Financial Market

This study aims to determine whether a firm’s dividends are influenced by the sector to which it belongs. This paper also examines the explanatory factors for dividends across individual sectors in India. This longitudinal study uses balanced data consisting of companies listed on the National Stock Exchange (NSE) of India for 12 years—from 2006 to 2017. Pooled ordinary least squares (POLSs) and fixed effects panel models are used in our estimation. We find that size, profitability, and interest coverage ratios have a significant positive relation to dividend policy. Furthermore, business risk and debt reveal a significantly negative relation with dividends. The findings on profitability support the free cash flow hypothesis for India. However, we also found that Indian companies prefer to follow a stable dividend policy. As a result of this, even firms with higher growth opportunities and lower cash flows continue to pay dividends. We also find evidence that dividend policies vary significantly across industrial sectors in India. The results of this study can be used by financial managers and policymakers in order to make appropriate dividend decisions. They can also help investors make portfolio selection decisions based on sectoral dividend paying behavior.

Does Leverage Influence Firms' Investment Decisions? The Case of BSE 500 Index Companies

The present paper analyses the impact of leverage on investment for BSE 500 index Indian companies excluding the banking and financial companies. The empirical methodology involves application of random effects and fixed effects models on panel data with 320 cross-sections over a period of 17 years with 5440 observations. We find that Hausman test fixed effects model is appropriate and it has been able to capture significant negative association between investment and leverage for both measures, namely, total leverage and long-term leverage. All the other coefficients except cash flows are significant but the coefficient values are quite low. Therefore, the study applies Wald test wherein all the coefficients are significantly different from zero. Sales, firm size and Tobin's Q have positive whereas firm age has negative association with investment. The association between investment and leverage for low and high growth opportunities firms has been examined using a dummy variable and the results indicate that there is positive association between these variables for high growth companies.

Firm Leverage, Agency Costs and Firm Performance: An Empirical Research on Service Firms in Turkey

The agency theory suggests that loan can reduce the agency problem of shareholders-managers (enhance the agency problem of shareholders-lenders) and increase (decrease) the performance of a firm. This article analyzes the impact of firm leverage on the performance of firms with high and low agency costs. Using the ordinary least squares (OLS) method and the 2008-2017 data of 52 firms whose stock certificates are processed in the service sector in Istanbul Stock Exchange; it was determined that leverage had a negative impact on firm profitability and that impact was higher for firms with higher agency costs (firms with higher growth opportunities and fewer tangible assets) and lower for firms with agency costs of free cash flows (firms with higher free cash flows).

Determinants of capital structure decisions among publicly listed Islamic banks

This research aims to examine bank specific, market and regulatory determinants of leverage and capital structure based on a panel data of publicly listed Islamic banks in 12 countries over the period 2008-2017. Apart from testing standard corporate finance parameters using both OLS and M-Estimators, this study adds several idiosyncratic and regulatory environment related determinants of leverage unique to Islamic banks. The significance of potential determinants is tested for market and book leverage as well as newly introduced ‘Islamic banking leverage’. Overall, the results show that Islamic banks with higher growth opportunities, tangibility, low profitability and low risk are likely to have a high leverage. Similarly, the findings suggest important role played by debt market conditions, share of investment accounts and regulatory environment in such decisions, providing an evidence of the significance of trade-off and pecking order theory in capital structure in Islamic banks. The results are more robust for market and Islamic banking leverage, rather than book leverage. The findings offer insights to regulators, standard setters and especially Islamic banks regarding parameters to strengthen their capital, enhance resilience and thus contribute to the stability of relevant financial. This paper is among the few extant studies that focus on listed Islamic banks and tests determinants based on stock market data.

(Un)intended Consequences? The Impact of the 2017 Tax Cuts and Jobs Act on Shareholder Wealth

We study the stock market reactions to the Tax Cuts and Jobs Act (TCJA), the most significant structural U.S. tax reform in over 30 years. In line with the stated intent of TCJA proponents, we find that the Act benefited highly taxed firms. However, the Act hindered firms with international operations as well as firms with high interest expense and tax losses. Counter to claims that the TCJA would quickly spur economic growth, we find that financially constrained and high growth opportunity firms did not benefit. Rather, market participants anticipate that most of the TCJA’s benefits will be passed on to shareholders via higher corporate payouts. We confirm these market expectations by documenting that firms did increase payouts via repurchases after the TCJA, but did not increase their corporate investments.