Industry Membership Research Articles

Industry Membership

Industry Membership

Internationale Standortverlagerung und Mitarbeiterproduktivität: Eine empirische Untersuchung deutscher Industrieunternehmen

Although there are numerous empirical examinations of the relationship between foreign direct investment and corporate performance, researchers to date have not been able to reach a consensus on findings. In this article, we report the results of an inquiry into the relationship between foreign direct investment and operational performance (i.e., labour productivity). Our findings indicate that a U-curve best reflects the form of the relationship and that the curve’s inflection point is dependent on firms’ industrial membership.

Industry Membership

Industry Membership

Improved Estimates of Correlation and their Impact on the Optimum Portfolios

To implement mean variance analysis one needs a technique for forecasting correlation coefficients. In this article we investigate the ability of several techniques to forecast correlation coefficients between securities. We find that separately forecasting the average level of pair-wise correlations and individual pair-wise differences from the average improves forecasting accuracy. Furthermore, forming homogenous groups of firms on the basis of industry membership or firm attributes (eg. Size) improves forecast accuracy. Accuracy is evaluated in two ways: First, in terms of the error in estimating future correlation coefficients. Second, in the characteristics of portfolios formed on the basis of each forecasting technique. The ranking of forecasting techniques is robust across both methods of evaluation and the better techniques outperform prior suggestions in the literature of financial economics.

Selecting Comparables for the Valuation of European Firms

This paper investigates which comparables selection method generates the most precise forecasts when valuing European companies with the enterprise value to EBIT multiple. We also consider the USA as a reference point. It turns out that selecting comparable companies with similar return on assets clearly outperforms selections according to industry membership or total assets. Moreover, we investigate whether comparables should be selected from the same country, from the same region, or from all OECD members. For most European countries, choosing comparables from the 15 European Union member states yields the best forecasts. In contrast, for the UK and the US, comparables should be chosen from the same country only.

Selecting Comparables for the Valuation of European Firms

This paper investigates which comparables selection method generates the most precise forecasts when valuing European companies with the enterprise value to EBIT multiple. We also consider the USA as a reference point. It turns out that selecting comparable companies with similar return on assets clearly outperforms selections according to industry membership or total assets. Moreover, we investigate whether comparables should be selected from the same country, from the same region, or from all OECD members. For most European countries, choosing comparables from the 15 European Union member states yields the best forecasts. In contrast, for the UK and the US, comparables should be chosen from the same country only.

Minimizing Competition? Entry-Level Compensation in Japanese Firms

This is the first empirical study of the determinants of pay for entry-level jobs among Japanese firms. Pay data of 1,382 companies obtained from the Nikkei survey was matched with company size, performance, industry, and foreign ownership data from Toyo Keizai's Japan Company Handbook. I found that unlike the results based on U.S. data, company size is not related to entry-level pay. Firm performance is positively related, but its effect is minimal. Industry membership and foreign ownership are related. I believe that these findings highlight the influence of the Japanese employment context and information sharing in Japan. Implications for research and practice are discussed.

Earnings quality in UK private firms: comparative loss recognition timeliness

UK private and public companies face substantially equivalent regulation on auditing, accounting standards and taxes. We hypothesize that private company financial reporting nevertheless is of lower quality due to different market demand, regulation notwithstanding. A large UK sample supports this hypothesis. Quality is operationalized using Basu's (1997) time-series measure of timely loss recognition and a new accruals-based method. The result is not affected by controls for size, leverage, industry membership and auditor size, or by allowing endogenous listing choice. The result enhances understanding of private companies, which are predominant in the economy. It also provides insight into the economics of accounting standards.

Market Reaction to Proposed Changes in Accounting for Purchased Research and Development in R&D-Intensive Industries

Many allege that the accounting profession has failed to adapt to fundamental changes in the business environment because it has not developed timely guidance for reporting intangible assets. Regulatory attention has also focused on the disclosure companies make with respect to intangible assets. Accounting for the value of intangible assets acquired in a merger transaction is a key component of this issue. Specifically, the Securities and Exchange Commission (SEC) alleged that companies routinely overstated the amount allocated to purchased in-process research and development (IPR&D) and stated that the SEC would take steps to enforce generally accepted accounting principles (GAAP) to eliminate abuses of GAAP with respect to IPR&D. Others alleged that the SEC was creating GAAP, that they were unfairly singling out certain industries, and that they were unfairly generalizing abuses made by a few firms to the actions of many firms. In other words, competing hypotheses emerged with the first suggesting that the accounting treatment of IPR&D by companies was improper, while the second suggests that the SEC was establishing new accounting standards without carefully considering the issues. This research examines the stock-price reaction for industry groups that are R&D intensive to proposed changes in accounting for IPR&D. We estimate the shareholder wealth effects associated with a series of events that indicate a potential regulatory change in accounting for IPR&D to infer the capital market's assessment as to whether the problem with IPR&D is inappropriate accounting on the part of companies, or inappropriate policy and enforcement on the part of the SEC and the Financial Accounting Standards Board (FASB). The results show that the stock prices of firms in R&D-intensive industries react negatively, on average, to events that increase the probability of new rules restricting IPR&D charges or that increase the expected degree of SEC scrutiny of these charges. However, the FASB announcement that there would be no immediate changes required in accounting for IPR&D produces a positive market reaction. The results support the theory that investors perceive limitations in reporting IPR&D as detrimental to the evaluation of the present value of R&D intensive firms' future cash flows, indicating that the market is more concerned about increased regulation of IPR&D than about the reliability of accounting estimates. Cross-sectional analysis examines four firm-specific variables: firm size, R&D expenses, recent acquisitions, and industry membership. Results indicate that the predicted reactions are strongest for firms with historically high R&D expenses and specifically those in the software industry. Larger firms and those with experience in acquiring firms with current R&D expense are less negatively affected by a call for the financial community to participate in reducing IPR&D charges. Finally, results indicate that firms having the greatest exposure to regulators' concerns have the most negative valuation impact.

Does Industry-level Analysis Improve Profitability and Growth Forecasts?

A long history of economic theory suggests that industry membership plays an important role in explaining a firm's financial performance. In this paper we investigate the usefulness of industry benchmarks and industry level analysis for predicting a firm's future profitability and growth. Specifically we investigate whether incorporating the industry performance metric provides incremental information over the firm specific metric for explaining performance one-year-ahead. We also investigate the usefulness of performing industry level analysis relative to an analysis of all firms pooled across the economy. We find little or no incremental explanatory power from incorporating industry information for predicting future profitability, defined either as return on equity or return on net operating assets. Nor do we find industry information incrementally informative for predicting growth in net operating assets. We do, however, find significant improvement from incorporating industry information for predicting growth in sales. These general results hold for one-, three-, and five-year windows, and are robust to alternative industry classification schemes.

Ionic liquids come of age?almost

Ionic liquids come of age?almost

Earnings Quality in U.K. Private Firms

UK private and public companies face substantially equivalent regulation on auditing, accounting standards and taxes. We hypothesize that private-company financial reporting nevertheless is lower quality due to different market demand, regulation notwithstanding. A large UK sample supports this hypothesis. Quality is operationalized using Basu's (1997) time-series measure of timely loss recognition and a new accruals-based method. The result is not affected by controls for size, leverage, industry membership and auditor size, or by allowing endogenous listing choice. The result enhances understanding of private companies, which are predominant in the economy. It also provides insight into the economics of accounting standards.

Growth history, knowledge intensity and capital structure in small firms

This paper explores the financial characteristics of successful Canadian small- and medium-sized enterprises (SME). It asks whether industry membership and early growth history play a role in shaping these financial characteristics. Our study reveals a strong correlation between capital structure and knowledge intensity. In contrast, growth histories are not obvious determinants of financial structure. Results also suggest that leverage strategies are more apparent in low-knowledge industries, in firms with higher expectations of future performance, and in businesses with more balanced financial structures. Industry comparisons are based on production activity and knowledge intensity. Growth distinctions are based on the firm's employment and sales history. We evaluate our hypotheses with survey data from a stratified random sample of 2775 Canadian firms. Proportional weighting techniques are utilized in all analyses.

Using Industry-Adjusted DuPont Analysis to Predict Future Profitability

Industry peer groups serve as both a theoretical and an intuitive benchmark in financial statement analysis. However, the practice of industry-adjusting financial ratios is sparse in existing financial statement analysis research. Much of the academic research on the mean reversion of profitability assumes economy-wide reversion targets. Economic theory supports the use of this target and empirical evidence is consistent with these predictions. However, some components of profitability may not revert to economy-wide averages because of structural differences across industries. For these components, industry averages serve as better long-term targets. DuPont analysis decomposes return-on-net-operating assets (RNOA) into two multiplicative components: profit margin and asset turnover, both of which are largely driven by industry membership. This paper investigates whether using industry-adjusted DuPont analysis is a useful tool in predicting future changes in RNOA. In contrast to prior research that used economy-wide targets and finds that these components are not useful in forecasting, I find that these components are informative when industry-adjusted and that using them helps predict future changes in RNOA in both in-sample and out-of-sample forecasting tests.

President's Report

I am pleased to report that the Society's Spring meeting in Harrogate was a huge success. Delegate numbers were in excess of 500 and the meeting generated a small profit for the Society. We were pleased to welcome our Patron, The Princess Royal, to attend port of the scientific programme and to meet members of the Industry Membership Scheme. For those of you who missed this important event, I would strongly urge you to book your professional or study leave for the London State of the Art meeting on 24/25th November.

South Carolina gets NSF cooperative fuel cell research center

In the US, the National Science Foundation has selected the College of Engineering & Information Technology at the University of South Carolina (USC) for the nation’s first Industry/University Cooperative Research Center (I/UCRC) for Fuel Cells. NSF funding for the center will total $210 000 over three years, supplementing $1.2m in industrial membership dues over the same period. This is a short news story only. Visit www.re-focus.net for the latest renewable energy industry news.

Earnings Management through Real Activities Manipulation

I find evidence consistent with managers manipulating real activities to avoid reporting annual losses: price discounts to temporarily increase sales, overproduction to report lower cost of goods sold, and reduction of discretionary expenditures to improve reported margins among firms reporting small annual profits. Cross-sectional analysis reveals that these activities are less prevalent in the presence of sophisticated investors, suggesting that the activities do not contribute to long-run value. Other factors that influence the extent of real activities manipulation include industry membership, the stock of inventories and receivables, and finally, incentives to meet zero earnings, including the presence of debt and growth opportunities. There is also some, though less robust, evidence of real activities manipulation to meet annual analyst forecasts.

An examination of the relationship between strategic group membership and hospital performance.

Membership in a particular strategic group, where a strategic group can be defined as groups of firms in an industry following similar competitive approaches and having similar market positions, defines the essentials of a firm's strategy. This study longitudinally examines the relationship between strategic group membership and performance in the hospital industry.

Firm and Industry Effects on Firm Profitability:: a Spanish Empirical Analysis

The purpose of this research is to study the relative importance of firm resources (firm effect) and industry membership (industry effect) in explaining firm profitability for a set of non-diversified manufacturing companies in Spain. We seek to obtain new results that confirm or deny previous findings, with an additional interest derived from the fact that our study uses more recent data (1994–1998) about a new group of companies. Moreover, firm size and industry definition enables us to examine how the relative importance of firm and industry effects can vary according to both factors.

Toward an Implied Cost of Capital

In this study, we propose an alternative technique for estimating the cost of equity capital. Specifically, we use a discounted residual income model to generate a market implied cost‐of‐capital. We then examine firm characteristics that are systematically related to this estimate of cost‐of‐capital. We show that a firm's implied cost‐of‐capital is a function of its industry membership, B/M ratio, forecasted long‐term growth rate, and the dispersion in analyst earnings forecasts. Together, these variables explain around 60% of the cross‐sectional variation in future (two‐year‐ahead) implied costs‐of‐capital. The stability of these long‐term relations suggests they can be exploited to estimate future costs‐of‐capital. We discuss the implications of these findings for capital budgeting, investment decisions, and valuation research.