Higher Future Profitability Research Articles

Insider pledging: Its information content and forced sale

This paper investigates the information content of insider pledging and the forced sale of pledged shares using U.S. data. Contrary to warnings from proxy advisors and the media about insider pledging and suggestions for its prohibition, our findings show that insider pledging announcements do not negatively impact shareholder wealth. Firms with insider pledging experience positive one-year abnormal stock returns and higher future profitability after the disclosure of pledging, indicating that insider pledging signals a firm's better growth prospects. These positive abnormal returns observed after the disclosure of insider pledging are more pronounced in firms with better corporate governance and are associated with pledging by certain insiders with superior information. In addition, we find that the stock price does not significantly decline following the forced sale of pledged shares, indicating that the forced sale does not pose downside risks for shareholders. Overall, our results suggest that insider pledging is not detrimental to shareholder value in the U.S., contrary to findings reported in the literature on emerging markets.

Green new hiring

The mere marketing of firms as environmentally friendly does not mean that the firms are genuinely green. In this paper, we propose a new measure, Green Score, to capture firms’ investment in green human capital based on the concentration of green skills required in firms’ job postings. First, we find that firms that increase their Green Score have higher future profitability. Second, firms that increase their Green Score generate more green patents, and those green patents are of higher quality and receive more citations. Third, traditional ratings widely used to evaluate firms’ environmental efforts do not consider firms’ Green Score. Overall, our new action-based measure is simpler and less subjective and it offers a larger time-series variation than traditional disclosure-based environmental ratings.

The role of financial constraints in firm investment under pollution abatement regulation

This paper empirically analyzes pollution abatement regulation within the context of the Clean Air Act's nonattainment status designation and shows that financial constraints are an important determinant of whether spending on mandatory pollution abatement crowds out or stimulates R&D investment and capital expenditure. We show that spending on mandatory pollution abatement and other investments are complements for financially unconstrained firms but substitutes for constrained firms. Financially unconstrained firms invest more and have lower current profits but higher future profits; financially constrained firms invest less and have stable current profits but lower long-term profits. (JEL: G32, G38, Q58).

Financial distress, corporate takeovers and the distress anomaly

PurposeThis paper examines the relation between takeover likelihood and the documented underperformance of distressed company stocks while exploring two competing hypotheses. The failure risk explanation predicts lower returns to distressed firms with high probability of being acquired because the acquisition reduces risk and investors' required return. Conversely, the agency conflicts explanation predicts lower returns when acquisition is unlikely.Design/methodology/approachThe likelihood of receiving a takeover bid is estimated, and portfolio tests explore the underperformance of distressed company stocks relative to non-distressed stocks across varying levels of takeover likelihood. Predictive regressions subsequently examine the relation between distress, takeover exposure and future firm operating performance including how the relation is affected by state anti-takeover laws.FindingsDistressed stocks underperform non-distressed company stocks by economically and statistically significant margins when takeover likelihood is low, yet there is no evidence of underperformance among distressed stocks with moderate or high takeover exposure. Consistent with agency conflicts playing a key role, distressed firms that are disciplined by takeover threats invest more, use more leverage and experience higher future profitability. State-level anti-takeover legislation limits this disciplinary effect, however.Originality/valueThe results show that the well-documented distress anomaly is driven by a subset of distressed firms whose managers face limited pressure from the external takeover market. The evidence casts doubt on the failure risk explanation and suggests that agency conflicts play a key role.

The Relation between Dividend and Financial Constraints to Firm Value

This study examines the relation between dividends and financial constraints to firm value using publicly traded firms in Indonesia from 2013 to 2017. The very exploration used a repeated cross section regression method to understand monotonic and non-monotonic alliance between dividends and financial constraints to firm value. The non-monotonic correlation measured by dummy variables for 6 dividends categories, i.e. 0 category is defined as firms that did not pay dividends and category 5 is defined as firms that pay dividends with the highest quintile. It is found that monotonic bond lowers the financial constraints that has more important and consistent positive effects on firm value relative to dividends. These findings imply investors to have higher preferences for a firm’s ability to realize good investment projects and provide higher future profits, relative to current profit in the form of dividends. It also found that non-monotonic connection between dividends and firm value and dividends and financial constraints have relatively equal positive effect to firm value.

Corporate Disclosure as a Tacit Coordination Mechanism: Evidence from Cartel Enforcement Regulations

ABSTRACTWe empirically study how collusion in product markets affects firms' financial disclosure strategies. We find that after a rise in cartel enforcement, U.S. firms start sharing more detailed information in their financial disclosure about their customers, contracts, and products. This new information potentially benefits peers by helping to tacitly coordinate actions in product markets. Indeed, changes in disclosure are associated with higher future profitability. Our results highlight the potential conflict between securities and antitrust regulations.

The Role of Accounting Conservatism in Capital Structure Adjustments

This study examines the relation between accounting conservatism and firms’ capital structure adjustments. We find that firms with more conservative financial reporting adjust their capital structure toward the target more quickly, especially within firms that rely more on external financing for adjustments. Furthermore, we find that the positive effect of conservatism on adjustment speeds is concentrated in under-levered firms and this effect occurs through conservatism facilitating debt issuance. In addition, we show that higher conservatism is associated with higher future profitability for under-levered firms. Taken together, our findings suggest that accounting conservatism plays an important role in facilitating under-levered firms’ adjustment of capital structure toward the target.

The Effects of Mandatory Pollution Abatement on Corporate Investment and Performance: Theory and Evidence from a U.S. Regulation

We provide a theoretical and empirical analysis of how pollution abatement regulation or the designation of nonattainment status affects corporate investment and performance. If consumers value environmental awareness, spending on mandatory pollution abatement and other investment are complements for financially unconstrained firms but substitutes for financially constrained firms. Financially unconstrained firms invest more, have lower current profits but higher future profits while constrained firms invest less, have stable current profits and lower long-term profits. This paper shows that firms’ financial resources are determinants of whether environmental regulation crowds out or stimulates R&D investment and capital expenditure.

Consumer satisfaction in e-shopping: An overview

Worldwide business-to-consumer (B2C) sales will touch $1.92 trillion. Everyday companies are adopting newer communication and information technologies to maintain and enhance their performances. Attracting new customers is challenging task in this competitive environment, therefore retaining existing customers is extremely important for survival. Studies have found that higher customer satisfaction translates into higher future profits, repeat purchase and positive word of mouth. As a result, marketers and researchers consider satisfaction as an important practical and theoretical issue. There have been many studies which decipher satisfaction and its interrelationship with other concepts. This paper integrates these diverse studies to provide a conceptual basis for understanding existing research.

Naughty Firms, Noisy Disclosure

We empirically study how collusion in product markets affects firms' financial disclosure strategies. We find that after a rise in cartel enforcement, U.S. firms start sharing more detailed information in their financial disclosure about their customers, contracts, and products. This new information potentially benefits peers by helping to tacitly coordinate actions in product markets. Indeed, changes in disclosure are associated with higher future profitability. Our results highlight the potential conflict between securities and antitrust regulations.

Why Don't Firms Claim Their Tax Refunds? Evidence from Private Debt Contracts

A puzzle is why a large proportion of firms eligible for income tax refunds do not file claims for such refunds on a timely basis. I hypothesize that firms with private information about higher future profitability and seeking debt financing forgo immediate use of provisions that allow the carryback of net operating losses as a signaling device to separate from firms with lower future profitability in order to obtain more favorable borrowing terms. Firms expecting lower profitability are deterred from mimicking because carrying net operating losses forward is less valuable to them. Consistent with this hypothesis, firms that do not file claims for refunds on a timely basis display higher future profitability and receive lower debt financing costs than firms that file when they first become eligible. These results are stronger when the level of information asymmetry about the borrower’s type is greater. This study is the first to offer a rational explanation for the low take-up rate of tax refunds. As a result, the evidence presented in this study could be relevant to academics and fiscal policy makers that seek to better understand how tax policies affect real decisions.

Accounting Conservatism and Managers' Investment Decisions

The role of accounting conservatism in corporate governance to mitigate agency problems associated with managers' investment decisions is proposed by Watts (2003), Ball and Shivakumar (2005) and Ahmed and Duellman (2010). In this research, we hypothesize that if accounting conservatism reduces managers' incentives to take on negative NPV projects and it can lead to corrective actions such as abandonment of a negative NPV Project, firms with more accounting conservatism ought to have higher future profitability. So we examined this hypothesis in companies listed in Tehran Stock Exchange over the period 2001-2010. The findings show no significant relationship between accounting conservatism and future profitability. These results are not consistent with Ahmed and Duellman's (2010) findings.

A bright side of financial constraints in cash management

This paper tests whether financial constraints play a disciplinary role in cash dissipation in the presence of agency problems. We hypothesize that when firms have difficulty raising external funds, empire-building managers of cash-rich firms will be less likely to spend cash on negative NPV projects as compared to unconstrained managers. Empirically, we examine firm performance after cash dissipation and associate it with the degree of financial constraints. We find that cash spending by managers in financially constrained firms is associated with higher future profitability and stock returns compared to cash spending by managers in unconstrained firms. Further tests reveal that the positive effect of financial constraints on firm performance is not driven by differences in corporate governance. Financial constraints actually substitute for good governance in disciplining managers. We find that corporate governance improves the efficiency of cash dissipation in unconstrained firms, but not in constrained firms. Likewise, financial constraints' disciplinary effect is found to be concentrated in firms that are poorly governed.

Evidence on the role of accounting conservatism in monitoring managers’ investment decisions

AbstractWatts (2003), among others, argues that conservatism helps in corporate governance by mitigating agency problems associated with managers’ investment decisions. We hypothesize that if conservatism reduces managers’ex ante incentives to take on negative net present value projects and improves the ex post monitoring of investments, firms with more conservative accounting ought to have higher future profitability and lower likelihood (and magnitude) of future special items charges. Consistent with this expectation, we find that firms with more conservative accounting have (i) higher future cash flows and gross margins and (ii) lower likelihood and magnitude of special items charges than firms with less conservative accounting.

Economically Optimal Management Strategies for the South Georgia Patagonian Toothfish Fishery

Abstract The fishery for Patagonian toothfish around the island of South Georgia in the Southern Ocean is a profitable operation targeting a high-value, slow-growing species. We substituted the complex Bayesian age-structured model currently used for assessments with a Schaefer production model, which performs equally well as an operating model for management strategy evaluation. Our analysis demonstrated that optimum long-term profitability using a discount rate of 2% would be achieved at a biomass of 59% of initial biomass, which is higher than the target biomass of 50% incorporated into the current management strategy, and at a reduction in effort of approximately 19%. A number of potential effort reduction strategies are investigated, several of which would achieve better conservation objectives and higher future profits from the fishery than those predicted using the current management strategy. JEL Classification Codes: Q22, Q28

Know your corporate IQ

PurposeMost business executives understand the importance of developing new products to support future growth. But they often fail to actively monitor their performance on this metric relative to their peers. Furthermore, many executives do not understand how innovation is critical to driving margins as well as growth. Tracking a company's Innovation Quotientsm, enables executives to assess how they are doing versus competitors in successfully developing new products and services. Examining a company's development pipeline enables executives to forecast their future Innovation Quotient and provides insights into the future performance of the business.Design/methodology/approachIn this article, Jackson considers a number of case examples of businesses that actively monitor their innovation performance and use it as an indicator of future success and value creation. Examples industries cited in the article include consumer products, electronics, industrial products and investment banking. The author then draws lessons that can be applied broadly across any business seeking to improve future growth and profitability through greater innovation.FindingsCompanies should proactively monitor their relative innovation performance compared to competitors using the Innovation Quotient metric. Measuring and monitoring a company's innovation rate and Corporate IQ can help management teams to take the tough choices, and build value for the long term when faced with the pressures of day to day performance. The companies that do the best job of building innovation capabilities and a strong development pipeline in tough times will be rewarded by even higher growth and margins when economic conditions improve.Originality/valueBusiness managers have always recognized that innovation is important to growth. This article extends that thinking to reinforce how a company's innovation performance relative to peers can drive not just future growth but higher future profitability as well.

Trade Openness and the Weak-Form Efficiency of Emerging Stock Markets

Basu and Morey [Trade opening and the behavior of emerging stock market prices, Journal of Economic Integration 20(1), 2005, 68-92] develop a theoretical model that predicts financial opening without trade reform does not lead to higher weak-form efficiency. The present paper brings their proposition to the data of 23 emerging stock markets. In general, the key results from fixed effects panel regressions support their prediction that trade liberalization, rather than financial openness, matters the most for informational efficiency. However, our empirical findings are not consistent with their postulated mechanisms through which it occurs. Firstly, it is not the official removal of non-tariff barriers that leads to higher stock price informativeness. What really matters for stock market investors is the actual level of economy integration in the reforming country with the world. Secondly, it is not the actual gain in productive efficiency in the real sector that leads to higher weak-form market efficiency. Instead, stock prices incorporate information about the expected gain from trade openness, such as higher future profitability or greater future productivity growth.

Internet Traffic and Portfolio Returns

We examined whether traffic data on sites owned by publicly listed Internet companies provide information about the future of those companies that is useful in portfolio management. The study shows that when Internet companies are classified into portfolios according to above-median and below-median traffic data, the more popular sites provide significantly better stock returns than the less popular sites. These results may be explained by the superior ability of popular sites to attract advertising revenues and extract greater compensation from affiliated sites. They may also indicate investors' perceptions that the more popular sites have greater network externalities (in which the value of being a part of the network increases with the number of members already in the network) and have the ability to generate higher future profits and cash flows. These results carried through to offline companies with Internet sites in 1999 but not in 2000, possibly because the online operations of offline companies were still not a material component of the companies' revenues and cash flows.