Higher Asset Turnover Research Articles

EPU and SMEs' financial performance: Industry vs. service sector

The objective of this paper is to analyze the Economic Policy Uncertainty impact on Small and Medium Enterprises’ financial performance, considering the role that sector plays and firm characteristics. Thus, a data sample of 80,620 Spanish SMEs was selected for 2012–2020. Using system Generalized Method of Moments estimators, the results show a negative impact, especially in the service sector. Industrial Spanish SMEs that are larger, younger, more indebted, with more growth opportunities and with higher asset turnover are the most resilient to EPU. The findings can help SMEs design better management strategies to deal with this uncertainty.

Career Concerns, Contract Choice, and “Unpaid” Executives

ABSTRACTWe examine a unique setting of publicly listed Chinese state-owned enterprises (SOEs), where some top executives are paid by government-controlled parent firms rather than by the firms where these executives work. Because their reported compensation is zero, these executives have been ignored in the literature. We find that the CEOs’ own personal characteristics, the nature of the CEO’s job responsibilities, and the environment in which the firm operates are significantly related to the CEO’s contract type. We also document that parent-paid CEOs have a significantly higher probability of future promotion than other CEOs. Compared to peer firms that directly pay their CEOs, firms with parent-paid CEOs have higher asset turnover. Contrary to concerns that parent-paid executives might extract resources from minority shareholders to the benefit of the parent SOE or local government, we document less use of tunneling or tax strategies under parent-paid contracts.JEL Classifications: G30; J30; M12; M52.

Permanent private equity: Market performance and transactions

AbstractUsing market data for a comprehensive sample of publicly listed permanent capital private equity funds, I confirm existing results in the private equity literature and establish new empirical facts for private equity investments. Over 2000–2019, only mezzanine funds outperformed public markets, whereas buyout, growth, and funds of funds underperformed somewhat, and venture capital funds underperformed significantly. Buyout funds exhibit performance persistence. Larger funds with higher asset turnover have higher performance, and funds with higher expenses have lower performance. Finally, contemporaneous and out‐of‐sample performance of buyout and mezzanine funds is associated with deal and exit transaction characteristics.

Operating Performance of Chinese Online Shopping Companies: An Analysis Using DuPont Components

Chinese online shopping industry has grown dramatically in recent decades. The purpose of this study is to investigate the key factors that affect the operating performance of online shopping companies in China. In particular, the study examines the three features of Chinese online shopping companies: (i) Multi-complex products/a single-special product, (ii) online store only/online and offline stores, (iii) US-listed/China-listed. The tests are leveraged by applying DuPont analysis which is widely used for identifying the sources of operating performance. DuPont analysis decomposes ROA (return on assets) into ATO (asset turnover) and PM (profit margin). A higher ATO represents efficient use of assets while a higher PM indicates efficient cost structure. By using seven Chinese online shopping companies, we find that companies selling multi-complex products have a higher ATO than companies selling a single-special product. However, multi-complex companies’ PM is lower than that of single-special companies, with no difference in ROA between those two groups. Second, online shopping companies with offline stores have a lower PM and ROA than online store only companies. Lastly, we document that US-listed online shopping companies have a higher ATO, PM, and ROA than China-listed companies. The results of this study provide important implications for the future development of the Chinese shopping industry. The findings may present the current situation and shortcomings of the companies, thereby playing a guiding role in the management and development of online shopping companies in China.

Corporate pension plans and investment choices: Bargaining or conforming?

This paper investigates the impacts of defined-benefit (DB) pension plans on the corporate investment choices between diversifying and non-diversifying investments. We find a firm's DB plan coverage is negatively associated with its propensity of making a major investment. Subject to a major investment decision, however, the firms with higher DB plan coverage is more likely to diversify, i.e. acquire firms abroad or in other industries, rather than invest in fixed assets or make non-diversifying (i.e. domestic horizontal) acquisitions. Moreover, in diversifying acquisitions, they are more likely to invest in countries or industries with strongly unionized workforce. Further analysis on post-investment performance shows that firms with higher DB plan coverage experience a greater improvement in operating profitability after a diversifying acquisition, and the improvement mainly comes from a higher asset turnover rather than cost reduction. On the other hand, DB plan sponsoring firms experience a decline in profitability after a large capital expenditure or a non-diversifying acquisition. We propose both bargaining motive and conforming motive can explain these results.

Social trust environment and firm tax avoidance: Evidence from China

We examine the impact of the social trust environment in which a firm is located on its tax avoidance in China and paying attention to the moderating effect of corporate governance and state-ownership. Drawing from theoretical and empirical work on firm tax avoidance and manager–shareholder agency conflict, we hypothesize that social trust can lower firm tax avoidance. It is because a high social trust environment can reduce agency conflict so that tax avoidance is less. Our findings are consistent with our hypothesis, and robust to a battery of robustness tests. Furthermore, we document that the association between social trust and firm tax avoidance is more pronounced for firms with weak corporate governance and state-owned. Moreover, we find that firms in more trustworthy provinces present less general and administrative expenses and higher asset turnover, corroborating our theoretical foundations with respect to agency cost in our hypothesis. Our findings suggest that social trust and its interactions with corporate governance and state ownership are important internal and external determinants on the variations in tax avoidance.

New Zealand State-owned enterprises: is state-ownership detrimental to firm performance?

ABSTRACTThis study examines the performance of State-owned enterprises by conducting a contemporary examination in the New Zealand environment. Applying both a cross-sectional and time-series approach, we document significant and consistent evidence that state ownership is negatively associated with firm profitability compared to private ownership. We also find evidence suggesting that state ownership is positively associated with asset turnover and labour intensity, but not associated with labour turnover. This implies that SOEs on average experience a higher asset turnover due to excessive labour employment, compared to private firms.

Activity Based Costing From the Perspective of Competitive Advantage: A Study of Nigerian Manufacturing Firms

Purpose: The focus of this study was to examine activity based costing from the perspective of competitive advantage. ABC can support the strategic management process and provide significant benefit to organizations. This examination utilized the contingency theory as a theoretical basis for the study.Methodology: Descriptive survey design was adopted. The data gathering instrument employed for this study is a structured questionnaire. Data are analyzed through SPSS version 16. Reliability analysis using Cronbach’s alpha value was applied on data collected. Factor analysis was employed using principal component method followed by Varimax with Kaiser Normalization, to find the factors or dimensions that explain variances by the data set. The factor analysis is based on four dimensions, namely, overall performance, strategic cost allocation method, increased efficiency and increased effectiveness having the factor loadings of over ±0.3. The regression results are positive and significant at the 5% level.Findings: Findings reveal that there is no statistically significant difference in cost reduction attained by ABC over Traditional costing, though ABC tended to have higher effect. Profits realized in Industrial and Brewery sectors of the Manufacturing companies surveyed were higher in ABC than in Traditional costing. The results further indicated that ABC organizations have higher asset turnover than non-ABC organizations. Also the perception of ABC in terms of strategic cost allocation method increased efficiency, effectiveness and has significant effect on firms’ performance.Policy recommendation: This study suggests that the developed scale can have significant implications to capture the perception of ABC. ABC should be applied by manufacturing companies in Nigeria since any little difference in cost – savings can influence managers’ decisions.

Career Concerns and 'Unpaid' Executives

A significant portion of CEOs in publicly-listed Chinese state-owned enterprises receive zero pay from the companies for which they work. Instead, they are paid directly by their controlling shareholder, which can be the Chinese government or parent firms that are controlled by the Chinese government. We explore how these “unpaid” executives are motivated and whether the outcomes of this unusual incentive mechanism differ from the conventional approach. Consistent with career concerns as their main incentive mechanism, we find that these CEOs have a significantly higher probability of future promotion than other CEOs. This result holds when we look at sub-samples in which individual CEOs switch payment regimes. We also find that compared to their peers with paid CEOs, firms with unpaid CEOs in general have higher return on assets, higher asset turnover, higher asset growth, and engage in less tunneling. To mitigate concerns of that our results are driven by CEO selection and to further investigate the use of implicit incentives, we conduct an event study using the Split Share Structure Reform in 2006. The Reform liberalized the Chinese stock market, thus strengthening the role of the market as an incentive mechanism. This mechanism provides a potential replacement for promotion incentives. Our evidence is generally consistent with a reduction in the strength of promotion incentives following the reform.

Client Selectivity Among Mid-Sized Auditing Firms: Evidence From The Post-Sox Audit Market Realignment

Considerable realignment in the audit market occurred in the wake of the Sarbanes-Oxley Act of 2002, with many clients switching from a Big 4 to a non-Big 4 auditor. We examine a sample of 212 former Big 4 clients who switched to either a mid-sized auditing firm (i.e., BDO Siedman, Crowe Horwath, Grant Thornton and McGladrey) or a small auditing firm. We consider reasons why clients may prefer a mid-sized firm rather than a small firm (called client demand characteristics) and reasons why auditors may be willing to accept an audit engagement (called auditor supply characteristics). Among client demand characteristics, we find that clients are more likely to engage a mid-sized auditing firm when the client is larger, has higher asset turnover, and has foreign operations. From an auditor supply perspective, we find that a mid-sized auditing firm is more likely to accept the client if the client is willing to pay higher audit fees and uses the auditor for non-audit services. Higher financial leverage could be seen from either a client demand or auditor supply perspective. From a client demand perspective, higher financial leverage would make clients prefer mid-sized auditors, as these clients needs for financing could lead them to seek a more brand-name auditor to enhance their credibility with banks and other creditors. From an auditor supply perspective, auditors may prefer to avoid clients with higher leverage, which reflects financial riskiness. These financially risky clients may result in adverse reputational and/or legal costs for the auditing firm. We find that clients with higher leverage are less likely to engage a mid-sized CPA firm. These results suggest that mid-sized auditors are somewhat selective in the clients they are willing to accept.

THE EFFECTS OF SPIN‐OFFS ON CORPORATE INVESTMENT AND PERFORMANCE

AbstractWe examine characteristics of firms involved in spin‐offs and test whether these spin‐offs induce changes in investment incentives and economic performance. We find that firms engaging in spin‐offs are larger, more highly leveraged, and have higher asset turnover and lower real asset growth than their industry rivals. We also find that spin‐offs generate significant increases in real asset growth and cash flow margin on sales for combined firm measures (spun‐off firm plus parent firm). The gains result from increases in real asset growth for parent and spun‐off firms, and improvements in cash flow margin on sales for parents. Our evidence is consistent with models in which spin‐offs create value by improving investment incentives and economic performance.