High-quality Firms Research Articles

Signaling Effects in AI Streamers: Optimal Separation Strategy Under Different Market Conditions

The fusion of livestreaming e-commerce and AI technology is booming, and many firms have started to replace human streamers with AI streamers. Despite their popularity, the acceptance of AI streamers by consumers varies widely and the signaling effects of AI streamers still remain unclear. We build an analytical model and compare scenarios where the acceptance level is either exogenously given or endogenously determined, highlighting the implications for firms’ optimal separation strategy. Our findings suggest that in markets with moderate information asymmetry, using both price and acceptance level as joint signals can be more profitable for high-quality firms. Conversely, in highly asymmetric markets, firms must incur additional costs to distinguish their high-quality products, regardless of the signaling strategy employed. Our paper provides strategic insights for firms aiming to leverage AI streamers in diverse market conditions.

Accrual Quality, Cost of Debt, and Credit Spread and Loss

AbstractOur study presents a method to dissect bond excess returns into components influenced by credit spreads and credit losses. Analyzing data spanning 48 years, we find that companies with higher accrual quality experience greater shocks from credit spreads and lesser shocks from credit losses. Conversely, firms with lower accrual quality face reduced credit spread shocks but heightened credit loss shocks. This indicates that high accrual quality firms benefit more from credit spread shocks, while those with lower accrual quality profit more from credit loss shocks. Notably, excluding credit spread shocks, future realized returns have a negative correlation with accrual quality. These accrual quality premiums are significant both statistically and economically, especially when credit spread shocks are not considered. Additionally, accrual quality has improved over the past 48 years due to enhanced accounting standards. Our findings reveal the importance of a reliable accrual quality metric and underscore the need to factor in credit spread shocks in asset pricing evaluations.

Quality of Listing Firms in Equity Primary Market in Kenya

Purpose: Kenya has experienced a drought in initial public offerings (IPOs) since 2014. Among varied causes of IPO Drought is decline in demand of IPO shares by retail investors. This paper assert decline in demand is partially attributed to low-quality listings in the past that underperformed in both short- and long-run. Design: The paper investigated quality of listing firms at the time of listing on all IPOs made between 2000 to 2014 in Nairobi Securities Exchange using various dimensions. Findings: The results revealed most of listing firms lacked growth opportunities, reported weak financial performances and engaged in earnings managements. Liberal listing guidelines aiming at attracting firms to list in numbers led to low-quality offerings. Implication: Strategy of liberal listing requirements is counterproductive as demand for the listings keep shrinking due to low-quality of listed firms that underperform in long-run. The study recommends reviewing of listing requirements so that only high-quality firms are allowed to list to keep the market vibrant. As long as low quality offerings are allowed, retail IPO investors will keep off the market as they suffer adverse selection costs

Local Productivity Spillovers

Using Canadian administrative data, this paper presents evidence of revenue and productivity spillovers across firms at fine spatial scales. Accounting for the endogenous sorting of firms across space, we estimate an average elasticity of firm revenue and productivity with respect to the average quality of other firms within 75 meters of 0.024. We find scant evidence that the average firm benefits from being surrounded by a greater amount of economic activity at this spatial scale. Sorting of higher-quality firms into more productive locations and higher average and aggregate quality peer groups is salient in the data. (JEL D22, D24, G32, L25, R11, R32)

The stabilizing effect of government guarantees in real economy investment: Evidence from China

This study examines how government guarantees affect the relationship between economic policy uncertainty and corporate investment for Chinese A-share listed companies covering 2012–2019. We find that government guarantees significantly weaken the inhibitory effect of economic policy uncertainty on firms' investment by changing the risk expectations of firms and banks. Mechanism tests show that this relationship is more pronounced in the case of high capital irreversibility, low market competition, high financing constraints, and external financing premiums, which proves the real option and financial friction mechanism. Heterogeneity tests suggest that the stable investment effect of government guarantees is more substantial for firms in lower marketization degree regions, non-state-owned, and more affected by information asymmetry. We further find that government guarantees significantly inhibit under-investment when economic policy uncertainty is high but do not significantly impact over-investment. For high-quality firms with more robust profitability or development capabilities, the positive impact of government guarantees on optimizing resource allocation efficiency is more significant. Our findings contribute to the literature on the cross-sectional variation of the relationship between government intervention and firms’ strategies in China.

Does Ownership Structure and Financial Health Affect Firm’s Earnings Quality? Evidence from Emerging Economy

Earnings quality is a demanding attribute of firm and is valued by investors in resource allocation decisions. High earnings quality firms create value for stakeholders and poor earnings quality causes value deterioration. This study takes into account earnings quality attributes of Pakistani corporate sector and investigates impact of ownership structure and financial health on firms’ earnings quality. Earnings quality has been measured by four attributes of accrual quality, earnings persistence, earnings predictability, earnings smoothness. A sample of 325 non-financial PSX listed Firms have been selected and classified into four unique categories on the basis of financial health (healthy and distressed) and ownership (family and non-family). The classification aims to determine level of earnings quality for each category. Results find significant effect of book financial position and ownership structure on earnings quality of firms. Findings reveal Earnings quality for non distressed family (NDF) firms was highest followed by non distressed non family firms (NDNF), while earnings quality for distressed family (DF) firms was poor and poorer for distressed non family (DNF) firms when firms were classified into these four categories. These results provide important implications for investors, analysts, regulators and standard setters.

Product Quality and Product Compatibility in Network Industries

Abstract Using an appropriate game-theoretic approach, this article develops a non-cooperative two-stage game in a Cournot duopolistic network industry in which firms strategically choose whether to produce compatible goods in the first decision-making stage. Quality differentiation affects the sub-game perfect Nash equilibrium (SPNE): (i) the network effect acts differently between low- and high-quality firms, depending on their compatibility choice; (ii) if the network externality is positive (resp. negative), to produce compatible (resp. incompatible) goods is the unique SPNE; however, this equilibrium configuration leads the high-quality firm to be worse off; (iii) there is room for a side payment from the high- to the low-quality firm to deviate toward incompatibility (resp. compatibility) under positive (resp. negative) network externality. This payment represents a Pareto improvement on the firm side but not from a societal perspective, as consumers would be worse off. The article also pinpoints the social welfare outcomes corresponding to the SPNE.

Decoding the Magic Formula: Navigating the Complex World of Stock Trading

Stock trading is complicated and risky. Investors' conditions, aspirations, and viewpoints shape their journeys. This article examines stock trading and investing, focusing on Joel Greenblatt's "The Little Book That Beats the Market" and "Magic Formula" investment technique. Greenblatt's book argues that stock trading is better than saving. The "Magic Formula" focuses on return on capital and earnings yield and is simple but effective. The Magic Formula helps investors find cheap, high-quality firms by evaluating them by these two ratios. The Magic Formula, like every investment approach, has limitations. Its success depends on the investor's goals, risk tolerance, and situation. The Magic Formula works for some investors but not others. This emphasizes the need of personalizing one's financial approach and knowing that one size does not fit all. Greenblatt also stresses the significance of knowing and believing in the Magic Formula, even when it seems to be failing. He believes that effective investing requires both picking the correct companies and sticking to your strategy, even when it's hard. This emphasizes the significance of patience and discipline in investing, which are often neglected but essential for long-term success. The Magic Formula is one of several investment techniques and theories, each with its own assumptions, methods, and risk profiles. From buy-and-hold to complicated quantitative models, these methods cover it all. Investors' goals, risk tolerance, and circumstances should determine their strategy. In conclusion, stock trading demands cautious navigation and intelligent decision-making. Joel Greenblatt's Magic Formula helps guide investors. Its effectiveness depends on the investor and is not a one-size-fits-all solution. Thus, each individual must establish their own stock trading success route with the correct knowledge, method, and mindset.

Game Analysis on Supervision of live goods problem with Tiktok Platform Participation including the absence of Lemon market

With the internet and technology development, the utilization rate of short video platforms has gradually increased, and online shopping has become very common. On September 20, 2016, Tiktok short video platform was launched. A TikTok mall is a delivery tool provided by Tiktok e-commerce for merchants. The platform reduces the threshold for merchants to meet the requirements and implements a comprehensive opening policy to obtain more user traffic. Inevitably, lowering the threshold brings the disadvantage of merchants selling fake and inferior products, leading to the lemon for the market and significantly impacting the platform atmosphere and user traffic. Based on the idea of mixed strategy and a journal about the online game theory of product quality, this paper adds more variables, taking into account the negative impact of Tiktok's actual scheme policy and lemon market. Constructing a game theory model including merchants and Tiktok regulatory department, analyze its nash equilibrium and derivative of each variable. Finally, find out that the lemon market exists on the Tiktok platform. Second, the higher cost of high-quality firms leads to strengthening supervision to prevent the low-quality firms from being driven out of the market. Third, the lower profit of low-quality goods, the merchants prefer to sell high-quality goods. The strategies selected by the regulatory authorities on the Tiktok platform and the strategies of the merchants are influenced by the production costs of different quality, the regulatory costs, and the rewards obtained from the efforts made by the regulatory authorities in sampling inspection. These factors will also influence their profits. This paper will prove the conclusion with accurate data.

Uncertainty and Immigrant Entrepreneurship: Evidence from Brexit

Immigrant entrepreneurs are a major driver of economic growth, and their decisions about where to locate can greatly affect the entrepreneurial ecosystem of a country. Meanwhile, increasingly uncertain immigration environments might discourage immigrants from establishing new ventures in host countries. This paper exploits the unexpected result of the Brexit referendum to investigate the relationship between immigration uncertainty and the entry of immigrant-founded ventures of different quality. We propose a model of immigrant entrepreneurial entry and introduce a new measure of venture quality at founding. We find that a surge in uncertainty decreases the growth rate of new immigrant-founded firms by 3.2%. The reliance on other immigrant actors exacerbates the negative effect that uncertainty has on entry. Moreover, low- and high-quality firms are the most affected, while the effect for medium-quality firms is negligible. Back-of-the-envelope calculations suggest that Brexit discouraged the entry of around 620 low-quality and 250 high-quality firms. Our model suggests that whereas founders of low-quality ventures might decide to take up employment, founders of high-quality ventures might be better off establishing their companies in another country. History: This paper has been accepted for the Organization Science Special Issue on Migration and Organizations. Funding: C. Acosta thanks EAFIT’s internal funding for research projects. Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2021.16011 .

Naming as business strategy: an analysis of eponymy and debt contracting

This study proposes that naming a firm eponymously is a mechanism that small private firms can use to signal their superior financial performance and commitment to fulfill debt contract obligations. Using 621,614 small private firms in Europe over the period 2008–2018, we find that small private eponymous firms pay significantly lower interest on their debts and have more long-term debt than non-eponymous firms. Our findings are robust to various controls and placebo tests. Additional analyses show that eponymy lowers the cost of debt and facilitates long-term debt via reputation signaling and private information. We also document that the effect of eponymy on debt contracting is most pronounced when there is less financial development and when firms’ dependence on external financing is low, consistent with the idea that high-quality firms opt for eponymy when they consider less external financing.

Accruals Quality, Shocks to Macro-uncertainty, and Investor Response to Earnings News

Research shows that a firm’s prior accrual quality affects the market reaction to earnings news, as it allows investors to gauge the level of noise in the news. Investor response to earnings news tends to be weaker (stronger) when a firm’s accrual quality is lower (higher). We aim to examine how macroeconomic shocks affect investor reactions. Drawing on ambiguity aversion literature, we argue that if macroeconomic uncertainty spikes before the earnings announcement, investors will favor a ‘better safe than sorry’ attitude; that is, they will tend to react strongly (weakly) to all bad (good) news, taking less into account differences in accrual quality. We consistently find that macro-uncertainty shocks cause (i) a stronger reaction to bad news for low-quality (but not high-quality) firms and (ii) a weaker reaction to good news for high-quality (but not low-quality) firms. The results are robust to alternative model specifications and sensitivity tests. Additionally, we show that if macro-uncertainty resolves in the post-announcement weeks, investors correct their underreaction to high-quality good news, especially if the shock is not extreme.

Talent Discovery and Poaching Under Asymmetric Information

Abstract We develop a model of the market for knowledge workers in which talent is discovered on the job. In the model, asymmetric information and firm-specific human capital combine to generate several predictions relating firm heterogeneity to talent discovery and poaching. We show that high-quality (i.e., large and high-productivity) firms are more likely to become talent poachers, while lower-quality firms are more likely to invest in talent discovery. Job-to-job flows are adversely selected, which implies that internally promoted managers are more productive than those who are externally promoted. The model generates several additional predictions linking firm heterogeneity to the distribution of managerial talent, productivity, compensation and promotions.

Optimal Distinctiveness: Revisited Theory and Tests on Entrepreneurial Finance Markets

Optimal distinctiveness describes a core paradox at the interface of institutional theory and strategic management: how do firms keep the balance between conforming with and being distinctive from their organizational peers? Empirical research finds inconsistent results of the position of optimal distinctiveness in different contexts. Building on the perspective of legitimacy, this paper proposes that highly distinctive firms may be perceived as morally and pragmatically legitimate in financial markets in which funders are novelty-expecting and capable of selecting high-quality firms. Thus, highly differentiated firms are legitimate in private equity and crowdfunding markets, making high distinctiveness optimal. This proposition is supported by the evidence that highly distinctive firms tend to fundraise in private equity and crowdfunding markets. Furthermore, the inclination to adopt crowdfunding is stronger if crowdfunders have a higher level of financial literacy.

Collective Reputation of Tourism Attraction: A Case Study of Lijiang City in China

ABSTRACT Collective reputation plays an extremely important role in many industries including tourism cities. With game theory approaches, based on Lijiang City in China, this article captures the collective reputation of tourism cities to deter low-quality products. On the one hand, low-quality firms have crowding effects on outputs and profits of high-quality firms in tourism cities. These effects are amplified in the long run. On the other hand, entry regulation, monitoring quality and labelling quality are suggested to deter low-quality firms to destroy the reputation of tourism cities. The policy implication is to deter low-quality firms to maintain the collective reputation of tourism cities.

Competition and Heterogeneous Innovation Qualities: Evidence from a Natural Experiment

Innovations differ substantially in their qualities, from major breakthroughs to small incremental refinements. What is the relationship between product market competition and the quality of innovations? We develop a model where competition encourages high-quality firms to innovate but discourages low-quality firms from innovating and examine the impact of competition on the quality of innovations, taking the implementation of the negative list system for market access in China as a natural experiment. It is found that competition has twofold impacts on the incentives of innovation and that competition improves the overall innovation quality through the improvement of innovation resource allocation. More competition implies a higher elasticity of substitution, leading to stronger incentives for innovation. Meanwhile, competition also decreases industry profits and increases the cost of innovation, which reduces the expected return on innovation, resulting in fewer incentives for innovation. The findings suggest that while R&D subsidies increase aggregate R&D investment, they encourage the survival and expansion of low-quality firms at the expense of high-quality firms and lead to misallocation of R&D resources, resulting in the decline of overall innovation qualities.

It’s good to be bad: The low quality advantage in consumer search markets

The management and marketing literature has found that consumers generally expect high-quality sellers to post high prices. We show that low-quality firms can exploit this in search markets to generate a low price perception. This price perception can lead to low-quality firms dominating search markets while producing a vertically inferior good at equal cost to high-quality firms.

Crowdfunding and bank financing: substitutes or complements?

In this paper, we analyze a firm choice between crowdfunding and bank financing. For many entrepreneurs, it is an important issue. We analyze a model where the choice of financing is affected by moral hazard problem regarding the choice of production scale that favors bank financing, and by the uncertainty about market demand that favors crowdfunding. We argue that long crowdfunding campaigns or campaigns with large targets usually are less efficient in mitigating moral hazard problem than small/short campaigns. We also argue that high-quality firms and firms with potentially large markets will tend to select bank financing while projects with largest amount of investment should select mixed financing where the firm uses a short crowdfunding campaign and a bank loan. Most of our model empirical predictions have not been directly tested so far while they are indirectly consistent with available evidence.

How Do Firms Respond to Demand Shocks? Evidence from the European Sovereign Debt Crisis

We examine how firms respond to domestic demand shocks using the large and unanticipated shock to government spending in European periphery countries during the 2010-2011 sovereign debt crisis. We find that firms with higher ex-ante exposure to government procurement contracts significantly increase their exports after the shock or exit. Older and larger firms are better able to substitute domestic sales with entry into export markets than younger and smaller firms. Firms with high-skill workers, high productivity and more educated managers are also more likely to start exporting. Our results suggest that mature and high-quality firms drive the response of tradable industries to domestic demand shocks.

Managerial ability and debt maturity

We examine whether and how managerial ability affects corporate debt maturity decisions. The demand for shorter maturity debt is expected to be higher in firms operated by high-ability managers, who possess the superior skills needed to anticipate firms’ economic prospects and communicate their private information, thereby alleviating information asymmetry and bolstering their reputation. We document that firms with high ability managers are associated with more short-term debt financing. The effect becomes stronger for firms facing severe information asymmetry problems, unconstrained firms or high quality firms. Supportive evidence is found from the analysis of short- and long-term debt issuance activity. Our findings remain robust to alternative measures of managerial ability and debt maturity choice, and are not driven by omitted variable bias, endogeneity concerns or industry group. Overall, we provide robust evidence that supports the signalling theory for debt maturity structure and contributes to the literatures on managerial ability.