High Growth Opportunities Research Articles

Does Investment Horizon Matter? Disentangling the Effect of Institutional Herding on Stock Prices

AbstractThis study finds that, over short horizons, herding by short‐term institutions promotes price discovery. In contrast, herding by long‐term institutions drives stock prices away from fundamentals over the same periods. Furthermore, while the positive predictability of short‐term institutional herding for stock prices is more pronounced for small stocks and stocks with high growth opportunities, the negative association between long‐term institutional herding and stock prices is stronger for stocks whose valuations are highly uncertain and subjective. Finally, we show that the destabilizing effect of institutional herding persistence documented in the recent literature is entirely driven by persistent herding by long‐term institutions.

The Impact of Loan Capital on the Baltic Listed Companies’ Investment and Growth

Loan capital and investment made with the help of it, grant strategic competitive advantages to companies. Loan capital and investment often are the elements supplementing each other: growth in investment results in the growth of loan capital and vice versa. But the conflicts of interests between shareholders, managers and creditors precondition either underinvestment or overinvestment, which, in its turn, has a negative impact on corporate value. Such an ambiguous influence of loans on corporate investment and growth is one of relevant fields of corporate finance governance that requires extensive analysis. Empirical tests performed by different authors are based on the data analysis of developed countries’ companies and the obtained results are rather ambivalent. So far, no research into interaction between investing and financial decisions has been carried out in the Baltic countries. To investigate the impact of loan capital on the investment and growth of the Baltic companies, financial indicators of Lithuanian, Latvian and Estonian listed companies from the annual reports-prospectuses published by these companies were used. The research includes only non-financial companies’ data because financial institutions adopt specific decisions on investing and financing, which are preconditioned by other factors. The research covers the period of 2000-2006 and uses the data of 76 companies (data from all listed non-financial Baltic companies: 35 companies from Lithuania, 28 from Latvia, 13 from Estonia). To determine the strength of influence of corporate debts and other specific factors on investment, the multidimensional analysis of correlation between the level of investment and such indicators, as cash flow, debt ratio, the level of non-current debts, the ratio of debts and the market value of asset, growth possibilities, sales, was used. To check the reliability of the obtained correlation, the value p was used. The presented findings show statistically important values when the level of significance is 0.01 (i.e. correlation between indicators was considered reliable and significant, when p 1). The obtained results show that in the Baltic countries the constraining effect of debt was recorded only among the companies with high growth opportunities. In the meantime, the capital structure of companies with low growth opportunities had no clear impact current investing. The results of research into the impact of capital structure on the growth of Baltic companies show that a higher level of debts preconditions a lower corporate value and smaller opportunities of growth.

(Financial Constraints Based on the Informativeness of Accounting Earnings)

Chinese Abstract: 融資限制指的是：公司無法按照最適投資所要求的條件來取得外部資金， 以致無法達到最適投資。本研究建構一個基於盈餘資訊性的融資限制之理論模 型，說明盈餘資訊性與投資現金流量敏感度（融資受限程度指標）之間的關係， 並運用領域交替迴歸模型進行實證。實證結果顯示：當公司融資未受限時，盈 餘資訊性本身與融資限制無關；但當公司融資受限時，此融資受限程度會隨盈 餘資訊性的增加而減少。此外本研究亦發現高成長機會的公司有較高的融資限 制。本研究的結論對財務工作的重要義涵在於：管理當局應增加其會計盈餘的 情報量，進而擴大融資乘數以提高投資上限，以避免公司產生融資限制而成長 受限。English Abstract: Financial constraint refers to the situation under which the firm cannot obtain the required external funds to achieve the optimal investment. In this study, I construct a theoretical financial constraint model based on informativeness of accounting earnings to explore the relationship between the informativeness of accounting earnings and investment cash flow sensitivity (a measure for the degree of financial constraints). Using the regime switching regression model, this study empirically tests the proposition derived from the above theoretical financial constraint model. The empirical result indicates that investment cash flow sensitivity is irrelevant to the informativeness of accounting earnings itself for a firm without financial constraint. However, when a firms is financially constrained, the investment cash flow sensitivity decreases as the informativeness of accounting earnings increases. In addition, the evidence also indicates that firms with higher growth opportunity have higher financial constraints. The important implication of this study to financial management is that management should increase the informativeness of accounting earnings to enhance the investment upper limit through financing multiplier, so that the firm would not suffer financial constraints and thus affect its growth.

When Cash is King: Funding Conditions and the Value of Cash Holdings

Holding cash is important for firms. Faulkender and Wang (2006) show that the value of cash is higher for financially constrained firms. Denis and Sibilkov (2010) show that these advantages arise from financially constrained firms being able to make value-enhancing investments that would not be possible without cash. We extend this literature by introducing time-varying aggregate financial constraints and showing that cash is most important when the supply of funding is likely to be low. Specifically, using changes in the Federal Reserve discount rate as an indicator of future funding availability, we find that the positive link between cash holdings and firm value is only evident in constrained funding environments. In unconstrained periods, there is little to no value (and sometimes evidence of value destruction) in holding high levels of cash. These results are robust to alternative funding supply measures. The high returns to high cash firms in constrained funding periods are driven by firms with higher growth opportunities and R&D expenditures, consistent with investors reevaluating the importance of cash balances in supporting future potential investment opportunities when external sources of capital are reduced.

Integrated Reporting and Investor Clientele

In this paper, I examine the relation between Integrated Reporting (IR) and the composition of a firm’s investor base. I hypothesize and find that firms that practice IR have a more long-term oriented investor base with more dedicated and fewer transient investors. This result is more pronounced for firms with high growth opportunities, not controlled by a family, operating in ‘sin’ industries, and exhibiting more stable IR practice over time. I find that the results are robust to the inclusion of firm fixed effects, controls for the quantity of sustainability disclosure, and alternative ways of measuring IR. Moreover, I show that investor activism on environmental or social issues or a large number of concerns about a firm’s environmental or social impact leads a firm to practice more IR and that this investor or crisis-induced IR affects the composition of a firm’s investor base.

The Structure and Pricing of Corporate Debt Covenants

We provide evidence on the covenant structure of corporate loan agreements. Building on the work of Jensen and Meckling [1976, Theory of the Firm: Managerial Behavior, Agency Costs, and Captial Structure, Journal of the Financial Economics 3, 305–360], Myers [1977, Determinants of Corporate Borrowing, Journal of Financial Economics 5, 145–147] and Smith and Warner [1979, On Financial Contracting: An Analysis of Bond Covenants, Journal of Financial Economics 7(2), 117–161]. We summarize and test the implications for what we refer to as the Agency Theory of Covenants (ATC), using a large sample of privately placed corporate debt. Our results are consistent with many of the implications of the ATC, including a negative relation between the promised yield on corporate debt and the presence of covenants. We also find that borrower and lender characteristics, as well as macroeconomic factors, determine covenant structure. Loans are more likely to include protective covenants when the borrower is small, has high growth opportunities or is highly levered. Loans made by investment banks and syndicated loans are also more likely to include protective covenants, as are loans made during recessionary periods or when credit spreads are large. Finally, we show that consistent with the ATC, firms that elect to issue private rather than public debt are smaller, have greater growth opportunities, less long-term debt, fewer tangible assets, more volatile cash flows and include more covenants in their debt agreements. An important byproduct of our analysis is to demonstrate empirically that covenant structure and the yield on corporate debt are determined simultaneously.

Business Model Innovation: Embracing Changes in a Dynamic Business Environment

In today’s dynamic era, a firm must continuously innovate to adapt to the rapid changes in business environment. Information and Communication Technology firms do not always need to invest heavily in new capital expenditures to come out with new technology, products or services, but can consider adopting business model innovation, as a novel and efficient way, to gain competitive advantage. The dynamic nature of the Information and Communication Technology industry shortens the life cycles of services and products. Thus, in many cases heavy capital expenditures may not make financial return justifiable. Business model innovation, which initiates novel ways of performing activities, linking customers, suppliers and partners, and/or changing participants in the transactions, may become an alternate solution. Information and Communication Technology firms can maximize business model innovation to leapfrog ahead of competition as first mover in a of high growth opportunity zone. This study investigates the role of business model innovation in embracing changes in the dynamic business environment of the Information Communication Technology industry, leading to competitive sustainability and firm performance. Using Structural Equation Modeling, this study performs the Confirmatory Factor Analysis tests on the observed and latent variables of business model innovation and firm performance and examines the structural model defining the relationships between these two latent variables. The study concludes that business model innovation has positive and direct impact to firm performance, and attained its objectives of contributing a theory based on synthesis and empirical evidence to further understanding how business model innovation impacts firm performance.

Do Special Dividends Convey Information?

This study examines the impact of special dividend announcements in a partial imputation tax environment in the UK. We find that the market reaction is positive. The price reaction is negatively related with growth opportunities and positively related with pre-announcement cash flow and size of the special dividend. Abnormal future operating performance is positively related with growth opportunities for the year ended after the announcement and the year after, and is positively related with the size of the special dividend for the year ended after the announcement and insignificantly related thereafter. Overall, our findings support the conclusion that in a partial imputation tax environment, managers use special dividends both to signal future performance for firms with high growth opportunities and to reduce agency costs for firms with low growth opportunities.

Fundamental Drivers of Dependence in REIT Returns

We analyse the empirical relationships between firm fundamentals and the dependence structure between individual REIT and stock market returns. In contrast to previous studies, we distinguish between the average systematic risk of REITs and their asymmetric risk in the sense of a disproportionate likelihood of joint negative return clusters between REITs and the stock market. We find that REITs with low systematic risk are typically small, with low short-term momentum, low turnover, high growth opportunities and strong long-term momentum. Holding systematic risk constant, the main driving forces of asymmetric risk are leverage and, to some extent, short-term momentum. Specifically, we find that leverage has an asymmetric effect on REIT return dependence that outweighs the extent to which it increases the average sensitivity of REIT equity to market fluctuations, explaining the strong negative impact of leverage on firm performance especially during crisis periods that has been documented in recent empirical work.

FIRM-SPECIFIC FACTORS AND THE MARKET REACTION TO DIVIDEND CHANGE ANNOUNCEMENTS: EVIDENCE FROM EUROPE

According the dividend signalling hypothesis, it is expected a positive relationship between dividend change announcements and the subsequent share price reactions. However, empirical results are not consensual. This study investigates whether firm-specific factors contribute to explain a negative market reaction to dividend change announcements, contributing to the scarce analysis of firm-specific factors explaining the inverse share price reaction to dividend change announcements. The study applies the panel data approach to three European markets. The results show that the market reaction to dividend change announcements is negatively associated with the firm size. We find that the negative market reaction to dividend increase announcements is associated with firms that have, on average, lower dividend changes and higher growth opportunities. Moreover, the results suggest that a high percentage of dividend negative changes, decreases the likelihood that the market reacts positively to a dividend decrease announcement. Globally, we find some evidence for the dividend signalling hypothesis.

How Micro-Level Determinants Affect the Capital Structure Choice: Evidence from Bosnia and Herzegovina

Abstract: The purpose of this study is to examine two leverage ratios using a sample of non-financial companies in Bosnia and Herzegovina (BiH). It was done by taking into account the joint effect of traditional capital structure determinants and managers' personal values and aspirations. We applied hierarchical regression analysis to determine the contribution of profitability indicators, firm size indicators, assets, growth, networking, managerial strategies, managerial psychology, managerial human capital and earnings volatility to explain the variance in capital structure. The results suggest that companies with less experienced owners/managers and higher firm growth have higher financial leverage ratios. In the analysis of the balance sheet leverage, financial proxies of capital structure seem to be significant in explaining capital structure variance. Therefore, companies with lower profitability, a lower level of fixed assets and higher growth opportunities have higher balance sheet leverage ratios. The findings provide better understanding of theoretical perspectives that can best explain how companies choose their capital structure in the transition economy context. Furthermore, empirical findings should help corporate managers to make optimal capital structure decisions.

Are Ethical Investments Good?

Our study considers whether ethical investments are also good investments. In contrast with previous studies, we utilize long-run event study methodology to examine abnormal returns associated with firms being included in, and dropped from, the MSCI KLD400 Social Index (MSCI KLD400). We find that there are positive and statistically significant long-run abnormal returns for firms being included in the MSCI KLD400. These abnormal returns are associated with higher shareholdings by institutional investors (who are subject to higher public scrutiny), higher analyst coverage and higher growth opportunities.

The effective factors of financial information quality in listed companies on Tehran Stock Exchange

The aim of this study was to investigate the effects of growth opportunities and dividend policy on the quality of financial reporting in Iran's capital market. The period in the study is 6-year (from 2006 till 2011) and the population is all listed companies in Tehran Stock Exchange. The sample was also obtained by screening methods, includes 84 companies. The results of the test research hypotheses using panel data suggest that in capital market of listed companies the quality of financial reporting in Iran had a direct relationship with the dividend policy. It means that increasing in dividend policy lead to increases in amount of financial reporting quality effect. Also obtained results indicate that growth opportunities have a direct impact on the quality of financial reporting. So that firms with higher growth opportunities will increase effectiveness and financial reporting quality.

Foreign Exchange Rate Exposure and Corporate Policies

Despite the fact that empirical tests estimate foreign exchange rate exposure net of corporate hedging, there are still firms that exhibit significant residual exposures. It is believed that when faced with higher foreign exchange rate exposure, companies are more likely to run into an underinvestment problem. Therefore, in the current study I explore whether foreign exchange rate exposure is reflected in corporate policies beyond hedging. I establish that companies with higher foreign exchange rate exposure tend to hold more cash, have a higher likelihood of accessing capital markets and are less likely to issue dividends. Further, the relationship between foreign exchange rate exposure and these corporate policies is more pronounced for firms for which the underinvestment problem is likely to be more severe, namely firms with higher growth opportunities and firms operating in more competitive industries. Thus, I believe that exchange rate exposure is relevant not only to the decisions of multinational corporations with international involvement. In support, I find that half of the significant foreign exchange rate exposures in my sample come from firms with only domestic sales.

Audit Committee Stock Options and Financial Reporting Quality after the Sarbanes-Oxley Act of 2002

SUMMARY The Sarbanes-Oxley Act (SOX) and its associated regulations significantly expanded the oversight role of audit committees and improved independence, but regulators bypassed restrictions on audit committee equity incentives. We examine the association of audit committee members' equity incentives and financial reporting quality in the post-SOX time period. We find that audit committee members' stock-option awards and holdings are positively associated with the likelihood of meeting/beating analyst earnings forecasts. On average, a company whose audit committee holds the mean value of exercisable option holdings is associated with a 10.0 percent increase in the likelihood of meeting or just beating its consensus analyst forecast. This effect increases to 17.8 percent for companies with high-growth opportunities. These results suggest that—even in the post-SOX era—the stock-option incentives provided to independent audit committee members are associated with reduced financial reporting quality. JEL Classifications: M41, M42

Financial Constraints and Dividend Policy

Using a sample of US listed firms over the 1989-2012 period, we find that financially constrained dividend increasing firms experience superior short-run abnormal stock returns, but suffer worse operating performance compared to similar unconstrained firms. More specifically, constrained firms in more competitive industries realize poorer long-run and operating performance. Likewise, constrained firms that increase dividends during the financial crisis also deliver post-dividend-increase inferior long-run return than do unconstrained firms. We also find evidence that constrained firms show worse stock market reaction to new equity issue announcements following dividend increase but display a positive market response if they potentially have high investment growth opportunities. Our results are robust to alternative financial constraint proxies and abnormal return measures.

The impact Debt Structure on Firm Invstments: Emprical Evidience from Turkey

The purpose of this study is to examine the impact of corporate debt structure on firm investments in Turkey. The regression and correlation analysis reveal a significant positive effect between corporate debt structure and firm investments. This effect is relatively strong for companies with high growth opportunities compare to companies with low growth opportunities. Consistent with the existent literature these findings provide support that a higher level of long-term debt in total debt structure reduces investments for firms with high growth opportunities. These effects need, therefore, to be incorporated in debt structure for Turkish firms to support their assets with proper financing sources.

Timing, earnings management and over-reaction around pure placings

This paper provides new evidence about firms conducting pure placings in the UK. It examines their abnormal performance (stock and operating), earnings management (accrual and real activities) and abnormal growth prospects for up to three years surrounding the event. It questions whether (i) timing, (ii) earnings management and/or (iii) over-reaction hypotheses can explain these performance, earnings quality and growth paths. The results document that pure placing firms have high earnings quality and abnormally high growth opportunities at the announcement. For this reason, the market is overenthusiastic. It expects more than what is eventually fulfilled, in line with the over-reaction hypothesis. Weak evidence that placing firms may exploit market timing is noted, whilst there is no supportive evidence of earnings management. These findings distinguish the earnings quality and growth opportunities of pure placing firms from that of firms conducting open offers, firm commitment offers and other seasoned equity offerings (SEO) that are not private placements, for which prior evidence reports mainly timing and/or earnings management prior to the event. This paper facilitates a better understanding of UK SEO.

Are ethical investments good?

Our study considers whether ethical investments are also good investments. In contrast with previous studies, we utilize long-run event study methodology to examine abnormal returns associated with firms being included in, and dropped from, the MSCI KLD400 Social Index (MSCI KLD400). We find that there are positive and statistically significant long-run abnormal returns for firms being included in the MSCI KLD400. These abnormal returns are associated with higher shareholdings by institutional investors (who are subject to higher public scrutiny), higher analyst coverage and higher growth opportunities.

Innovation efficiency and asymmetric timeliness of earnings: Evidence from an emerging market

This study investigates the impact of intellectual capital output on the asymmetric income timeliness of firms in Taiwan, which is an emerging economy with a high concentration of research and development (R&D)-intensive firms but poor investor protection. The higher growth opportunities and increased risk faced by R&D firms make them more vulnerable to shareholder litigation. Specifically, I examine whether companies that are less efficient at transforming new ideas or techniques into granted patents are more timely in their recognition of losses and less timely in their recognition of gains in response to higher expected litigation costs. Indeed, I observe a negative relationship between innovation efficiency and asymmetric income timeliness and this is more evident among highly R&D-intensive firms. In a parallel analysis, I also find that the observed greater earnings conservatism of low-innovation-efficient firms is more evident following the introduction of the Securities and Futures Investor Protection Act in the year 2003, when a class action litigation mechanism was established. Together, these findings highlight the role of accounting conservatism in mitigating the potential litigation risk faced by high-tech industries.