Industry-specific Effects Research Articles

Does Power Pay Off?

CEOs have power in varying degrees yet it is not clear that more CEO power is better than less. Any attempt to clarify this relationship must first address the challenge of identifying an appropriate measure for CEO power. We develop an aggregate measure with which we investigate the relationship between CEO power and firm performance. We find evidence that firms with powerful CEOs perform better than other firms as measured by Tobin’s Q. This difference is both economically and statistically significant. We use Fixed Effect multivariate regressions to take into account time and industry specific effects. This result has implications for firms seeking to optimise firm performance. We tackle concerns of endogeneity by using lagged values of our main explanatory variable and separately employing an instrumental variable. An extension confirms that research and development spending is one channel through which more powerful CEOs generate additional firm value.

Research Note—Business Value of Information Technology: Testing the Interaction Effect of IT and R&D on Tobin's Q

The business case for investing in information technology (IT) has received increasing scrutiny in recent years. We propose that IT investments create additional business value through interactions with other business processes. In this paper, we formalize the interaction effect of IT by focusing on one core function, namely, research and development (R&D). We hypothesize that investments in IT can interact with and complement a firm's R&D investments, enhancing the firm's shareholder value creation potential. We test this by hypothesis by estimating the interaction impact of IT and R&D investments on Tobin's q, a forward-looking measure of firm performance using a recent multiyear, firm-level, archival data set. Our results suggest that the interaction effect of R&D and IT on Tobin's q is positive and significant after controlling for other firm- and industry-specific effects. Our findings provide rigorous empirical support for recent anecdotal evidence in the managerial literature with respect to the manner in which IT is enabling R&D-intensive innovation processes. Our analysis underscores the need for coordinated investments in IT and R&D, and permeating IT capabilities throughout other business processes such as R&D.

The Legal Origins of Corporate Social Responsibility

The legal origin literature documents that civil and common law traditions have different impact on rules and economic outcomes. We contribute to this literature by investigating the relationship between corporate social responsibility and legal origins. Consistently with the main differences in historical and legal backgrounds and net of industry specific effects, the common law origin has a significant and positive impact on the Corporate Governance and Community Involvement domains, while the French legal tradition of civil law on the Human Resources domain. We also document that the lack of observable differences in the environmental domain can be explained by firms' progressive convergence to industry sustainability standards.

Evidence of an 'Energy-Management Gap' in U.S. Manufacturing: Spillovers from Firm Management Practices to Energy Efficiency

In this paper we merge a well-cited survey of firm management practices into confidential U.S. Census microdata to examine whether generic, i.e. non-energy specific, firm management practices, spillover” to enhance energy efficiency in the United States. We find the relationship in U.S. plants to be more nuanced than past research on UK plants has suggested. Most management techniques have beneficial spillovers to energy efficiency, but an emphasis on generic targets, conditional on other management practices, results in spillovers that increase energy intensity. Our specification controls for industry specific effects at a detailed 6-digit NAICS level and shows that this result is stronger for firms in energy intensive industries. We interpret the empirical result that generic management practices do not necessarily spillover to improved energy performance as evidence of an “energy management gap.”

Intellectual capital investments: evidence from panel VAR analysis

Purpose – Investments in intellectual capital (IC) are often linked to competitive advantages that improve economic profit and increase the value of a company. However, this effect is reciprocal: companies that generate higher cash flow can invest more in IC. The purpose of this paper is to analyze a dynamic relationship between IC components and economic profit, with a special emphasis on industry specific effects in pharmaceutical, retail, steel, telecommunications, and service sectors. Design/methodology/approach – Panel vector autoregression was used to deal with the mutual influence of IC components, the lag effect, and heterogeneity. The data were taken from Compustat database and covers the period from 2001 to 2010. Findings – The paper proves that there is interaction between investments in the IC components and company performance. However, there are sectoral differences: there is a positive impact of economic profit on human capital in retail; in the steel industry a mutual influence is revealed. Moreover, interaction between different IC components is detected in telecommunication and steel industries. Originality/value – This is the first study to present clear evidence of the effects of performance on IC investment decisions. The time lag in the effects of IC investments was estimated and compared for different industries. On the methodological side, the paper presents a rather simple method capable of yielding results consistent with other studies and yet rich enough to be applied to an analysis of sectoral differences in dynamic IC investment decisions.

Market Pricing of Credit Rating Signals

This paper contributes new evidence on market pricing of rating changes. We examine the relation between spreads and ratings for a very large and comprehensive sample of corporate bonds, which allows us to test for country- and industry-specific effects, as well as to explore the differences between the calm and distressed market conditions. The results show that the effects of rating actions on market prices are significant and depend on the current state of the market. While during favourable market conditions rating actions are not crucial for market pricing, they become very significant in the periods of crisis. JEL Classification: G12, G14, G01, G21

Stock Market Reactions to Customer and Competitor Orientations: The Case of Initial Public Offerings

Recognizing that initial public offerings (IPOs) represent the debut of private firms on the public stage, this study investigates how pre-IPO customer and competitor orientations (CCOs) affect IPO outcomes. Building on information economics, we propose that CCOs influence investors' sentiments toward an IPO and that both IPO-specific variables (which influence the credibility of CCO information) and facets of the organizational institutional and task environments (which influence the appropriateness of CCO information) moderate this influence. We test the framework using data collected from computer-aided text analysis, expert coders, and secondary sources for 543 IPOs across 43 industries between 2000 and 2004. A Bayesian shrinkage model, which accounts for industry-specific effects and uses latent instrumental variables to address CCO endogeneity, shows that CCOs positively influence IPO outcomes. Furthermore, (1) underwriter reputation and venture funding positively moderate the effects of CCOs; (2) technological and market turbulence positively and institutional complexity negatively moderate the effect of customer orientation; and (3) technological turbulence, competitive intensity, and institutional complexity positively moderate the effect of competitor orientation. Also, accounting for endogeneity using latent instrumental variables substantially improves the predictive validity of the model, relative to alternative model specifications.

Did Federal Funds Target Rate Changes Affect the Market Value of Insurance Companies?

In this paper, we study the sensitivity of insurance companies’ stock returns with respect to expected and unexpected changes in the Federal funds target rate over the period 1988-2007. We confirm Bernanke and Kuttner (2005) that, as stocks in general, insurance stock returns are only sensitive to the unexpected changes in the Federal funds target rate, but not to the expected ones. However, market-adjusted stock returns do only show a reaction for the non-life insurers. For life insurers, there does not seem to be an industry specific effect on their market value. This can be explained by the business models life and non-life insurers adopt.

Dynamic Factor Models With Macro, Frailty, and Industry Effects for U.S. Default Counts: The Credit Crisis of 2008

We develop a high-dimensional, nonlinear, and non-Gaussian dynamic factor model for the decomposition of systematic default risk conditions into latent components for (1) macroeconomic/financial risk, (2) autonomous default dynamics (frailty), and (3) industry-specific effects. We analyze discrete U.S. corporate default counts together with macroeconomic and financial variables in one unifying framework. We find that approximately 35% of default rate variation is due to systematic and industry factors. Approximately one-third of this systematic variation is captured by the macroeconomic and financial factors. The remainder is captured by frailty (40%) and industry (25%) effects. The default-specific effects are particularly relevant before and during times of financial turbulence. We detect a build-up of systematic risk over the period preceding the 2008 credit crisis. This article has online supplementary material.

Varieties of employment relations: continuity and change in the global auto and banking industries

This paper examines continuity and change in employment relations in two key industries – auto assembly and retail banking – across five countries: the USA, Australia, Germany, South Korea and China. The subsequent papers that constitute this symposium are discussed drawing on the varieties of capitalism (VoC) approach. Particular emphasis is laid on the interplay between continuity and change in employment relations in different types of capitalism, the conceptualization of Asian VoC and the industry-specific effects of globalization on employment relations.

Industry-specific effects of antidumping activities: evidence from the US, the European Union and China

This article analyses industry-specific effects of Antidumping (AD) activities on trade, using the system Generalized Method of Moments (GMM) in dynamic panel date models. In the process of doing so, this article selected three frequent AD users, such as the US, the European Union (EU) and China. Additionally, we chose the metal/steel, chemical and plastic/rubber industries for the US cases; chemical, metal/steel and machinery/electronics industries for the EU cases; and the chemical industry for the Chinese cases. Based on the analyses conducted herein, we detected positive evidence of industry-specific impacts of AD measures imposed by the three frequent users.

Dynamic Factor Models with Macro, Frailty and Industry Effects for US Default Counts: The Credit Crisis of 2008

We develop a high-dimensional and partly nonlinear non-Gaussian dynamic factor model for the decomposition of systematic default risk conditions into a set of latent components that correspond with macroeconomic/financial, default-specific (frailty), and industry-specific effects. Discrete default counts together with macroeconomic and financial variables are modeled simultaneously in this framework. In our empirical study based on defaults of U.S. firms, we find that approximately 35 percent of default rate variation is due to systematic and industry factors. Approximately one third of systematic variation is captured by macroeconomic/financial factors. The remainder is captured by frailty (about 40 percent) and industry (about 25 percent) effects. The default-specific effects are particularly relevant before and during times of financial turbulence. For example, we detect a build-up of systematic risk over the period preceding the 2008 credit crisis.

A Decomposition Analysis of Capital Structure: Evidence from Pakistan’s Manufacturing Sector

This study investigates the determinants of the various components of debt—short- and long-term debt and their categories—in the case of nonfinancial listed firms in Pakistan for the period 2008–10. We make a significant distinction between these determinants depending on the components of debt issued: long-term or short-term forms of debt. Our results show that large firms are more likely to have access to long-term debt borrowing than small firms and that, due to supply constraints, small firms resort to short-term forms of debt. Firms with higher potential for growth prefer using less long-term debt as well as debt with fewer restrictive arrangements in order to become more financially flexible. Firms with sufficient fixed assets can generate external finance more easily and at lower cost by using these assets as collateral, which supports the tradeoff theory. Firms generating high levels of profit, however, may choose to finance their investments using internal resources rather than by raising debt finance, which conforms to the pecking order theory. Our results also confirm the presence of the inertia effect and industry-specific effects, and are robust to alternative estimation techniques.

The Institutional Development of the European Union in the 1990s and its Industry Specific Effects: A Case of the Automobile Industry

This study attempts to identify the measures and policies related to the institutional development of the EU in the 1990s and the mechanisms that resulted in specific consequences on the automobile industry. The removal of visible and invisible barriers to internal trade has promoted the competitiveness of the industry by enhancing the accessibility to expanded markets which has increased the capacity of firms to reduce unit cost by realising scale economies. The measures of the Single Market Programme promoting standards (such as technical harmonisation and emission control, fair competition, and liberalisation of distribution channels by further abolition of block exemptions together with strong challenges from overseas) increased overall competition. Also, figures show that the introduction of the single currency provided the automobile industry with a more stable business environment stemming from reduced transaction costs and elimination of the risks of exchange-rate fluctuations.

Macro, Frailty, and Contagion Effects in Defaults: Lessons from the 2008 Credit Crisis

In the aftermath of the financial crisis, banks have been subjected to a sequence of stress tests to measure system stability. Such tests are formulated in terms of adverse economic scenarios rather than in terms of systematic default rate increases.This suggests that macroeconomic conditions fully capture default stress. However, two additional explanations can be found in the literature for the occurrence of default clusters: autonomous default rate dynamics, also known as frailty, and industry-specific effects including contagion. We develop a new methodological framework to disentangle, quantify, and test these three competing explanations. Using U.S. default data we find that observed macro and financial market factors account for only 30--60% of systematic default risk. Consequently, stress-testing frameworks that only control for observed macro conditions leave out a substantial share of systematic risk. The components not related to business-cycle dynamics (frailty) are particularly relevant before and during times of financial market turbulence. For example, we find clear systemic risk build-up over the period preceding the 2008 credit crisis.

Regional restructuring and manufacturing firm performance in a Central-Asian transition economy: observations from Kazakhstan

In this paper we analyse survey data in order to identify the regional performance and characteristics of manufacturing industry in Kazakhstan during the transition period of the late 1990s. Our analysis is based on a unique survey-based microeconomic dataset from 202 Kazakhstani manufacturing firms. We employ cross-sectional logit models in order to analyse the determinants of manufacturing firm performance in the period. We find that in addition to individual firm characteristics, the spatial aspects of this industrial restructuring are found to be a key determinant of firm performance. Moreover, these spatial restructuring effects appear to dominate both industry-specific or firm-specific effects. Our results therefore suggest that the process of economic transition is associated with significant regional industrial restructuring.

Industry specific effects in investment performance and valuation of firms

A necessary criterion for a performance measure in corporate governance is the degree to which it mirrors how well the management succeeds in maximizing firm value. Such a performance measure is marginal q which links changes in firm value to the investments undertaken by the management. Empirical studies of investment and performance based on marginal q have demonstrated the usefulness of this measure. Most research however, has mainly focused on long-term performance. This paper takes a short-term perspective and, based on the marginal q-theory, considers how firms’ market values change in the extreme stock price cycle of a stock market bubble. Using a data set of listed Swedish corporations we find an anomaly in form of a new industry specific effect that, in addition to investment, explains changes in firm value.

Patterns and determinants of entry and exit in industrial sectors in Sweden

This paper uses a unique dataset which gives a complete picture of the pattern of entry and exit in industrial sectors in Sweden during the period 1997–2001. The importance of profitability, industrial market growth, tangible capital intensity, intangible capital intensity and economies of scale for entry and exit are investigated. A fixed effects panel data model is used, and it is shown that the inclusion of unobserved industry-specific effects explains many of the inter-industrial differences in entry and exit rates. For policymakers, this implies that it is difficult to formulate an entrepreneurship policy that can be expected to be equally successful across all industries. It is also shown that investments in intangible assets is one way to compete, while economies of scale tend to deter entry rates.

Finite sample multivariate structural change tests with application to energy demand models

This paper considers finite sample motivated structural change tests in the multivariate linear regression model with application to energy demand models, in which case commonly used structural change tests remain asymptotic. As in Dufour and Kiviet [1996. Exact tests for structural change in first-order dynamic models. Journal of Econometrics 70, 39–68], we account for intervening nuisance parameters through a two-stage maximized Monte Carlo test procedure. Our contributions can be classified into five categories: (i) we extend tests for which a finite-sample theory has been supplied for Gaussian distributions to the non-Gaussian context; (ii) we show that Bai et al. [1998. Testing and dating common breaks in multi-variate time series. The Review of Economic Studies 65 (3), 395–432] test severely over-rejects and propose exact variants of this test; (iii) we consider predictive break test approaches which generalize tests in Dufour [1980. Dummy variables and predictive tests for structural change. Economics Letters 6, 241–247] and Dufour and Kiviet [1996. Exact tests for structural change in first-order dynamic models. Journal of Econometrics 70, 39–68]; (iv) we propose exact (non-Bonferonni based) extensions of the multivariate outliers test from Wilks [1963. Multivariate statistical outliers. Sankhya Series A 25, 407–426] to models with covariates; (v) we apply these tests to the energy demand system analyzed by Arsenault et al. [1995. A total energy demand model of Québec: forecasting properties. Energy Economics 17 (2), 163–171]. For two out of the six industrial sectors analyzed over the 1962–2000 period, break and further goodness-of-fit and diagnostic tests allow to identify (and correct) specification problems arising from historical regulatory changes or (possibly random) industry-specific effects. The procedures we propose have potential useful applications in statistics, econometrics and finance (e.g. event studies).

Effective controls for research in international accounting

Numerous studies have examined the value relevance and other characteristics of international and country-specific accounting standards. This paper evaluates the experimental designs of selected studies with respect to the controls essential for effective research. Both cross-country and within-country research designs share a common need for controls. Perhaps the most distinctive element of effective design in these studies is the control for institutional, cultural, and structural differences between countries. Previous research shows that the key outputs of various country-specific accounting standards are functions of a variety of factors including accounting-related issues, legal origin, shareholder protection, the information environment, financial markets, and enforcement of these standards. In addition, effective studies of country-specific or international accounting principles require control for firm and industry-specific effects and for self-selection bias, as in conventional within-country examinations. When controls are not sufficient, observed differences in the outputs of alternative accounting standards may result from differences between countries or firms rather than from different accounting principles. We review a sample of recent research with attention to these control considerations.