Higher Firm Profitability Research Articles

The nexus between female CEOs, government subsidies and green innovation: probing board diversity dynamics

The scant literature on the role of female CEOs (FCEOs) has attracted the attention of all stakeholders. Therefore, the study addresses several knowledge gaps by empirically exploring the nexus between FCEOs, government subsidies (GS), board gender diversity (BGD), and green innovation (GI). To empirically validate our contentions, we employed a robust methodology using a dataset of Chinese-listed non-financial firms. Our in-depth analysis indicates that FCEOs are associated with lower GI, while GS is associated with higher GI. Interestingly, we also find that BGD helps align the interests of all stakeholders and positively moderates the relationship between (i) FCEOs & GI and (ii) GS & GI. Our further sub-sample analysis reveals that the influence of BGD is more pronounced in high-profitability firms and firms that operate in environmentally sensitive industries. The overall findings emphasize the significant role of FCEOs, GS, and BGD in driving GI that ultimately promotes quality management and brings excellence to the businesses within Chinese non-financial listed firms. Further, the unique results are consistent even after employing multiple statistical techniques, using several measurements of key variables, and controlling for the possible endogeneity issue.

The Significance and Influence of Financial Ratios on Performance of Non-Financial Companies Listed at Dar es Salaam Stock Exchange Tanzania

The purpose of the study was to examine the influence and significance of selected financial ratios and asset turnover of eight non-financial listed companies at the DSE using panel data analysis for a period of twelve years (2010–2022). The data used was extracted from secondary data in the annual financial reports of the companies within the study period. The coefficients of the fixed effect model (FE) regression model were generated. The analysis revealed that return on capital employed and asset turnover had a positive and statistically significant impact on financial performance, while debt-to-equity had a negative and statistically significant impact on the financial performance of the non-financial firms at DSE. However, current ratio and inventory turnover had a positive but statistically insignificant impact, while interest cover ratio had a negative but statistically insignificant impact on the financial performance of the non-financial firms listed at DSE. The study concludes that capital employed and asset turnover are vital in influencing profitability, and managers should manage the return on capital employed so as to enhance business operations, which ultimately improves financial performance. The study recommends that the management team needs to strive for a higher asset turnover to generate higher sales volumes that ultimately lead to high-profit firms and cater to shareholders' goals of wealth maximisation.

COVID-19 Pandemic, Corporate Investment and the Real Option Value

ABSTRACT The outbreak of COVID-19 has a huge negative impact on the firms’ business activities. This paper investigates the effects of COVID-19 pandemic on corporate investment and firm value from the real option perspective. Based on the real options-based model (ROM) proposed by Zhang (2000), we find that COVID-19 crisis accelerates low-profitability firms to reduce investment and exercise put options timely, thereby increasing the value of put options. This finding mainly exists in areas where the COVID-19 pandemic was worse and firms that did not receive government subsidies related to COVID-19. We also find that the value of put options is more pronounced for non-state-owned enterprises and firms with higher internal control quality. However, we do not find the change of growth option value of high-profitability firms during the COVID-19, which indicates that it is difficult for high-profitability firms to grasp the investment expansion opportunities under the pandemic. Our study sheds light on the applicability of ROM and the importance of real option in firm valuation under the major public emergencies.

TRADE RECEIVABLES COLLECTION PERIOD AND FIRM VALUE: EVIDENCE FROM LISTED TURKISH INDUSTRIALS

This paper shows that average collection period of trade receivables (ACP) and a deterioration in the credit quality of trade receivables both have negative effect on firm value. Evidence is based on Turkish industrial firms listed on Borsa Istanbul over 2005-2017 period. The effect exists only for firms whose average collection period increased by more than thirty days within the last one to three years. Similarly, the value consequence of ACP holds for high-profit firms, but not for low-profit firms. This study utilizes system generalized method of moments in all estimations and treats trade receivable policy variables as endogenous due to omitted variable bias concerns. Overall, findings suggest a destructive effect of lengthened deferred payment terms on firm value specifically for high-profit firms and for firms with a historical upward trend in ACP.

Regulatory Reforms and Entrepreneurs’ Choices of Firm Structure: Evidence from Sub-Saharan Africa

How do regulatory reforms lowering the upfront and ongoing barriers to registration and legal incorporation affect entrepreneurs' choices of firm structure? This study examines the effects of institutional reforms reducing the barriers to formalization on entrepreneurs' choices of firm structure. These reforms lowered the upfront barriers to formalization in terms of registration and incorporation time, fees, procedures, and the ongoing barriers to formalization, comprising labor, profit, and property taxes. The analyses employ firm-level nationally-representative samples from 36 countries in Sub-Saharan Africa over 2004-2019 comprising 13,441 informal micro, small, and medium enterprises (MSMEs) and event-history models with cohort and country fixed effects to evaluate the effects of these reforms on entrepreneurs' decisions about whether to register and legally incorporate their businesses. The findings show that reforms that reduced the upfront and ongoing formalization barriers increased entrepreneurs' registration rates and legal incorporation by between 68 and 93 percent. Reforms reducing the upfront barriers to formalization were most effective for small, high-productivity firms. In contrast, those reducing the ongoing barriers to formalization were most effective for large, high-profitability firms. These findings show that entrepreneurs' choices of firm structure depend on their institutional environments.

Screening through Red tape and Determinants of Bribes

I find that firms under-report profits in tax statements to reduce bribe demands. In response, bribe-extorting bureaucrats exploit differences in firms' opportunity costs of time to screen out firms with resources to pay bribes. In equilibrium, high-profit firms with cash holdings pay larger bribes in return for shorter paperwork processing times. Firms that hide profits face costs, because they cannot use unreported profits to acquire capital. Firms also make voluntary bribe payments to bureaucrats in return for government services and face associated positive search costs. Results hold only for firms without bureaucratic connections.

Global secular stagnation and the rise of intellectual property monopoly

Explanations for slow global growth (secular stagnation) correctly focus on income inequality and wage formation but are incomplete. They ignore the source of wages and fail to ask why a rising profit share has not produced more investment. Older but essential insights on stagnation from Keynes, Schumpeter and Veblen complement orthodox and post-Keynesian analyses to generate a more robust explanation based on the distributional conflict over profit among firms. These thinkers highlight the importance of corporate profit strategy and organizational structure for investment behavior. A politically mediated process of strategic interaction has transformed the old Fordist dual industrial structure into a tripartite structure composed of high profit volume firms with monopolies based on intellectual property rights (IPRs), physical capital-intensive firms protected by an investment barrier to entry, and low profit volume labor-intensive firms. Profit data from Compustat and Orbis show that IPR-based firms have a lower marginal propensity to invest. Other firms with smaller profit volumes forego investment from fear of creating excess capacity in a slow growth environment. High profit firms also tend to pay higher wages, creating income inequality. Changes in antitrust, employment and intellectual property law can remedy this situation.

Immigration and firm productivity: evidence from the Canadian Employer-Employee Dynamics Database

Previous studies on the impact of immigration on productivity in developed countries remain inconclusive, and most analyses are abstracted from firms where production actually takes place. This study examines the empirical relationship between immigration and firm-level productivity in Canada. It uses the Canadian Employer-Employee Dynamics Database that tracks firms over time and matches firms with their employees. The study finds that there is a positive association between changes in the share of immigrants in a firm and changes in firm productivity. This positive effect of immigration on firm productivity is small, but it is stronger over a longer period. The effect tends to be larger for low-skilled immigrants as compared with highly-skilled workers, as firm productivity growth is more strongly associated with changes in the share of recent immigrants (relative to established immigrants), and immigrants who intended to work in non-high skilled occupations (relative to immigrants who intended to work in high-skilled occupations). Those differences are more pronounced in technology-intensive and knowledge-based industries. Immigration is found to have little estimated effects on capital intensity in a firm. Finally, this study finds that high skill and lower skill immigrants have similar effects on average worker earnings arising from the positive productivity effect of immigration, but only skilled immigrants are associated with higher firm profits.

Environmental and financial performance in the European manufacturing sector: An analysis of extreme tail dependency

In this study, we investigate the impact of environmental performance on financial performance. We argue that environmental performance heterogeneously affects firms with different profitability level. Using data for 288 European manufacturing firms over the period 2005–2016, we investigate the said relationship under the financial slack argument and the contrasting paradigms of neoclassical and the instrumental stakeholder theory. Employing a quantile regression framework enriched with a set of instrumental variables to more effectively approximate environmental performance, we find (i) firms with superior environmental performance tend to be more profitable; (ii) the relationship between environmental and financial performance can be characterised as positive and heterogeneous across the conditional distribution; (iii) financial and environmental performance are endogenously related only when high profitability firms are examined.

Firm Profitability and Adjustment of Capital Structure: Indian Evidence

The present study investigates the relevance of capital structure dynamics in Indian context by examining the speed at which firms adjust towards their target capital structure. Apart from symmetric adjustment speed, the study also investigates the asymmetries in adjustment speed based on profitability of firms. Using partial adjustment framework on an unbalanced panel of 28,532 firm-year observations comprising 2,718 listed firms over a period of 2004–2005 to 2015–2016, the study finds that Indian firms maintain target leverage and adjust towards the same with a moderate annual adjustment speed of around 32 per cent. The study further observes that high-profitability firms, in general, adjust significantly faster than low-profitability firms which possibly indicate better accessibility in the financial market, lesser costs of adjustments and ability to adjust payout ratio for the former than the latter. Further investigation reveals that high-profitability firms make more adjustment in case of over-leverage, whereas low-profitability firms make more adjustment in case of under-leverage. These results possibly indicate the implications of availability of internally generated funds. Overall, the study concludes that adverse selection cost plays important role in the target adjustment process and hence, both trade-off theory and pecking order theory have relevance in Indian context.

The Effect of Audit Quality on Firm Performance: A Panel Data Approach

This study attempts to examine the effect of audit quality on firm performance. It uses financial statements of non-financial firms listed as EGX 100. The population studied consists of thirty non-financial firms. The study covers a five year period 2010-2014. It applies panel data analysis. Independent Variables are Auditor Experience (measured by Big-4) and Auditor Independence (measured by auditor Rotation ROT). Dependent Variables are Return on Assets ROA and Return on Equity ROE. In accordance with the Random Effect Model results, BIG 4 and ROT have an insignificant impact on the ROA and ROE of the firm. External and internal financial statement users may benefit from the study only when dealing with high-profit firms.

Rent Sharing in China: Magnitude, Heterogeneity and Drivers

Do firms in China share rents with their workers? We address this question by examining firm-level panel data covering virtually all manufacturing firms over the period 2000-2007, representing an average of 200,000 firms and 54 million workers per year. We find robust evidence of rent sharing (RS): workers that would move from low- to high-profit firms would see their wages increase by about 45%. The results are based on multiple instrumental variables, including firm-specific international trade shocks. We also present a number of complementary findings that allow us to understand better the nature of RS in the country: RS is weaker in firms with more women and less educated workers; RS involves an element of risk sharing, as wages also decrease when profits fall; RS is lower in regions with more latent competition from rural workers; higher minimum wages tend to reduce RS; and, while employer labour market power reduces wages, it increases RS. Overall, despite its importance, RS in China is smaller and more symmetric than in developed economies, which reflects the weaker bargaining power of its workers and the different scope of its labour market institutions.

The Impact of Better Work

The impact of Better Work (ILO/OFC) is assessed on costs, profits, productivity and business terms for firms in Vietnam, Indonesia and Jordan. Participation in Better Work has a positive productivity effect on Vietnamese and Indonesian firms. Productivity gains are captured by workers in the form of higher pay. Unit costs rise due to increased compliance with payment requirements such as the minimum wage, paying as promised and mandated promotions. Despite the increase in wages, profits for firms in Better Work Vietnam and Indonesia increase due to improved business terms such as larger orders and possibly an increase in price. The impact of Better Work Jordan suggests that exposure to the program for individual firms may have temporarily increased costs and lowered profits. However, the Jordanian apparel industry becomes more profitable over time, suggesting a positive country reputation effect. Participation in Better Work and firm performance are not jointly determined by manager quality. Early entrants into Better Work are, on average, high cost-low profit firms.

Do labor unions affect firm payout policy?: Operating leverage and rent extraction effects

While previous literature documents weak effects of unionization on payout policy on average, we find that this average relationship hides significant heterogeneous effects of unionization on payouts across firms that depend on firm profitability. The effect of unionization on payouts is negative for low-profitability firms but positive for high-profitability firms. We posit that labor unions (i) increase operating risk, which negatively affects payouts, but (ii) increase potential for rent extraction from unions, which could induce shareholders to demand positive payouts. Higher profitability mitigates the negative effect while strengthening the positive effect, making the relation between unionization and payouts less negative or more positive. We provide evidence consistent with both the negative and positive effects of unionization on payouts. Our empirical design mitigates endogeneity concerns. Further, an instrumental variable analysis and a cross-sectional test using right-to-work laws confirm that endogeneity is unlikely to drive our results.

Wages and International Tax Competition

AbstractWe introduce wage bargaining and private information into a model of profit shifting and tax competition between a large and a small country. Shifting profits to the small country not only reduces a firm's tax bill but also creates private information on profitability, altering the wage bargaining in favor of the firm. This additional shifting incentive makes the tax base of the large country more elastic and leads to higher outflows, lower wages, higher firm profits and lower equilibrium tax rates. Tax rates are no longer the only determinant of the direction and extent of profit shifting.

A longitudinal exploration of the relations between electronic word-of-mouth indicators and firms’ profitability: Findings from the banking industry

Prior research on electronic word-of-mouth (eWOM) has focused on the predictive utility of star ratings. Extending these studies conceptually and methodologically, this paper employed Automatic Text Analysis to investigate the predictive utility of evaluative textual information contained in online reviews. Based on a real-world dataset that matched eWOM with annual financial performance of 68 banks over an eight-year period, this study tested patterns of the bi-directional relations between eWOM indicators and banks’ profitability over time. Results showed that both star ratings and consumers’ verbalized emotions in eWOM significantly predicted increases in firms’ future profitability, which is measured by Return on Assets. Star ratings emerged as a consistent predictor, and their effects lasted for at least two years. Expressed anger predicted lower profitability in the following year and explained additional variance beyond the star ratings. Finally, higher firm profitability was prospectively related to higher star ratings and more verbalized positive feelings in next year’s eWOM.

Sticky Expectations and Stock Market Anomalies

We propose a theory of one of the most economically significant stock market anomalies, i.e. the ``profitability'' anomaly. In our model, investors forecast future profits using a signal and sticky belief dynamics a la Coibion and Gorodnichenko (2012). In this model, past profits forecast future returns (the profitability anomaly). Using analyst forecast data, we measure expectation stickiness at the firm level and find strong support for three additional predictions of the model: (1) analysts are on average more pessimistic for high profit firms, (2) the profitability anomaly is stronger for stocks which are followed by stickier analysts, and (3) it is also stronger for stocks with more persistent profits.

Stock Recommendations for Politically Connected Firms

AbstractSocial network connections of corporations can significantly affect operating performance and firm valuation. Political connections are one form of social networking which often manifests into improved firm profitability as a result of political favors granted by politicians. However, analysts often have greater difficulty forecasting the earnings of politically connected firms than those of non‐connected firms. This is because politicians often grant political favors to firms in an unpredictable manner making it difficult for market participants to time precisely when political benefits will translate into higher firm profitability. I examine how political connections affect analysts’ stock recommendations using a unique dataset of political contributions in the US over the period 1993–2012. I show that analysts’ recommendations are less profitable for firms with high connectedness than for firms with low (or no) connectedness. I also find that analysts are less effective in translating earnings forecasts into profitable recommendations for highly connected firms. Overall, the findings suggest that analysts do not impound all of the information concerning corporate political connections efficiently into their primary research outputs.

CEO Fitness and Firm Value

This study provides evidence suggesting that CEOs’ physical fitness has a positive impact on firm value, consistent with the beneficial effects of fitness on, e.g., cognitive functions, stress coping and job performance. For each of the years 2001 to 2011, we define S&P 1500 CEOs as fit if they finish a marathon. CEO fitness is also associated with higher firm profitability and higher M&A announcement returns. Our identification strategy includes CEO-firm fixed effects, instrumental variables, permutation tests, random effects, and time-varying CEO, firm and industry effects. An additional analysis of sudden CEO deaths, based on a fitness measure not limited to running, confirms our results.

What Explains the Gross Profitability Premium?

A long-short strategy based on sorting firms on gross profitability has been shown to generate substantial excess returns relative to the traditional Fama and French factors. While those excess returns are also robust to the inclusion of a momentum factor, I show that they are to a large degree driven by operating leverage. High profitability firms have large fixed costs that substantially exceed those of low profitability firms. This difference in operating leverage is highly persistent over time and across firms. Operating leverage affects expected stock returns by increasing the risk of profits. I also provide novel evidence that operating leverage does not explain the value premium: value firms do not have a higher degree of operating leverage than growth firms.