Firm Investment Research Articles

Effects of government digitalization on firm investment efficiency: Evidence from China

In the digital era, digitalization has a significant impact on economic development and firm growth. However, compared to digital economy, there is still a lack of studies exploring the impact of government digitalization on firms' behavior. This study aims to provide new evidence that the digital technology-driven change in the public sector also influences the efficiency of resource allocation at the micro level. This study examines the impact of China's government digitalization reform on firm investment efficiency using the difference-in-differences model and a firm-level sample of China's listed firms for the period 2012–2020. The study finds that government digitalization enhances firm investment efficiency, alleviating both underinvestment and overinvestment. Government digitalization improves firm investment efficiency by reducing the real option value of investment, easing financial constraints, and mitigating agency problems. Additional analysis shows that government digitalization behaves better in NSOEs, unregulated firms, and firms in the regions with higher levels of digital technology infrastructure.

Green investment in South Africa: A perception of overinvestment or underinvestment in energy and mining firms

This paper investigates green investments in energy and mining firms in South Africa to determine the efficiency level in terms of overinvestment and underinvestment. The general Richardson residual measurement model is employed, and an enhanced model is created by including variables that influence green investment, such as political connections and pollutant emissions. Data from 17 companies (5 energy and 12 mining) were used because of the significant effects of their operations on the environment over the period between 2015 and 2022. The study findings show that, in comparison to the estimated optimal investment level, South African energy and mining firms are not consistent regarding their investment level. It interplays between underinvestment and overinvestment. However, both firms demonstrated the tendency to green investment inefficiency due to underinvestment recorded in the latter years of the sample period. The study provides understanding as regards green investment levels of energy and mining firms and hence recommends adequate oversight and formulation of environmental policy by the government to ensure green investment efficiency in line with both national and international policies and regulations to facilitate a sustainable environment.

Accounting Firm Investment in Diverse Talent: Evidence from Charitable Giving to Historically Black Colleges and Universities (HBCUs)

SYNOPSIS The accounting profession suffers from diversity, equity, inclusion, and belonging (DEIB) deficiencies. Although the largest accounting firms have touted their investments in diversity efforts, the extent to which firms have invested in recruiting diverse talent is unclear. Using accounting firms’ charitable giving data, we show that, although firm giving to historically Black colleges and universities (HBCUs) has increased over time, the total allocation percentage to HBCUs has remained relatively stagnant. Further, monetary giving to HBCUs is concentrated among a few HBCUs with higher prestige, and all HBCUs receive relatively little overall compared with predominantly white institutions (PWIs). Discussions with HBCU accounting faculty and accounting firm professionals support our main findings and suggest additional forms of investment that accounting firms can leverage to help address DEIB deficiencies. Overall, our study provides actionable recommendations that can inform public accounting firms’ efforts as they seek to develop a more diverse workforce. Data Availability: Data are available upon request. JEL Classifications: M41.

CEO narcissism and the agency cost of debt

This study investigates the relationship between CEO narcissism and debt financing costs, highlighting a potential trade-off between leadership traits and firm financial well-being. While prior research has identified potential benefits associated with narcissistic CEOs, such as enhanced innovation, we demonstrate that such leadership incurs higher borrowing costs, as evidenced by elevated bond yields in firms led by narcissistic executives. This effect is amplified for grandiose narcissists, suggesting that investors are particularly wary of their risk-taking tendencies. Leveraging a natural experiment, we establish a robust causal link between narcissism and debt costs, revealing higher bond yield premiums demanded by investors in firms with narcissistic CEOs. These findings underscore the critical importance of considering CEO personality traits, particularly narcissism when evaluating corporate governance practices and ensuring optimal alignment with stakeholders' interests.

VAT rate cut and corporate maturity mismatch: Evidence from China's VAT rate reform

This paper explores the causal link between value-added tax (VAT) and corporate maturity mismatch between investment and financing, using China's VAT rate reform, which lowered VAT rates and was enacted on July 1st, 2017, as a quasi-natural experiment. The results show that the VAT rate reform apparently reduces the degree of corporate maturity mismatch. This is because, on the financing side, the reform improves corporate profitability and thus reduces short-term debts, while on the investment side, the reform has no impact on firm investment. Furthermore, the interaction effects of VAT rate reform and other tax incentives on investment are significantly negative, and short-term debts are riskier than long-term ones, strengthening the above mechanisms. We also find that market competition enhances the reform effects on corporate profitability and corporate maturity mismatch, shedding light on the role of market competition in shaping effect. Finally, we find that the reform effects are primarily significant for non-state-owned enterprises, firms in capital-intensive industries, and firms registered in middle and western China. These findings enrich the understanding of the economic consequences of VAT rate reform and help the government introduce better policies to stimulate investment and control financial risks.

Retraction notice: Calibration issues under the EU capital regime for investment firms

Retraction notice: Calibration issues under the EU capital regime for investment firms

Evaluation of Fair Value Relevance and Sensitivity to Valuation Assumptions

This paper evaluates whether the relevance of investment properties measured using Level 3 inputs is impacted by the assumptions underpinning the determination of fair values. Evidence is provided of investors generally finding investment property fair values determined with Level 3 inputs to be relevant, and the values are not discounted in market price. However, this is not the case when there is evidence of firms using optimistic assumptions in the determination of fair values. Specifically, there is a material price discount of recognized investment property values as well as fair value gains for these observations. Our research setting of real estate investment firms has several advantages as these firms typically have as their major assets investment properties whose fair value and rental income can be observed from financial reports. This allows investors to easily infer and compare the key valuation assumptions as captured by the capitalization rate. The implication for more general circumstances where valuation assumptions cannot be inferred from financial reports is that detailed disclosures of assumptions are necessary for users to assess the reliability of fair values determined with Level 3 inputs.

Promoting a reputation for quality

AbstractI model a firm that invests in the quality of its product and influences how that quality is disclosed. The firm can promote its product; at random intervals it can disclose quality for a cost. At low reputations, promotion allows a firm to reestablish itself and the firm invests to take advantage of this. However, the ability to promote crowds out incentives for investment at high reputations generated by other information sources, in particular information that is generated whenever the firm is selling a low quality product, leading to reputation cycles in settings where high reputations would have otherwise persisted.

Unlocking auditors’ perceived external employability: exploring antecedents and behavioral consequences

PurposeIn a rapidly changing career landscape where lifelong job security is no longer guaranteed, this study investigates how audit firms play an important role in shaping their employees’ career perceptions and the subsequent effects on auditor behavior. Specifically, it explores the link between audit firms’ career development initiatives and auditors’ perceptions of external employability – an important determinant of auditor behavior. Using the framework of social exchange theory, the study investigates how perceived external employability affects both relational and operational behaviors of auditors.Design/methodology/approachThe study employs structural equation modeling on survey data from 359 auditors.FindingsThe results indicate that when audit firms actively support career development, it positively contributes to auditors’ perceived external employability. A higher perceived external employability, in turn, leads to positive behavioral outcomes among auditors, including stronger relational behaviors (such as professional commitment) and operational behaviors (including heightened professional skepticism and reduced behaviors that could compromise audit quality).Originality/valueThis study uncovers a paradox where perceived external employability, typically viewed as a risk, emerges as a potent driver of desirable auditor behavior. In today’s dynamic career landscape, emphasizing individual-centered and flexible careers, these results highlight the benefits of perceived external employability. Rather than undermining audit services, increased perceived external employability driven by firm investments in auditors’ careers acts as a catalyst for desirable auditor behavior. Organizational support in terms of career development practices creates an environment where auditors are more committed, professionally skeptical and uphold the quality of audit services.

Short selling and firm investment efficiency

This paper investigates the informativeness of short sales on detecting firm investment inefficiency. Neoclassical and agency theory suggest that investment inefficiency destroys firm value by allocating resources to less-valued uses. This paper finds that short-sellers adjust their short positions before the announcement of a financial statement, to use their information advantage on firm investment inefficiency. The relation between the short positions in a firm and its future investment inefficiency is both statistically and economically significant, and robust to a broad set of control variables. Subsample analyses show that the informativeness of short sales positions about future investment inefficiency is concentrated on overinvestment firms, firms with little board independence, and firms with low CEO incentive pay.

On stakeholder theory and corporate investment under financial frictions

AbstractThe view that corporations have a wider focus than just maximising shareholder value has received considerable attention from practitioners, managers, and academics alike. We investigate the Q theory of corporate investment with financial frictions when management maximises stakeholder value instead of shareholder value. Different objective functions are investigated. We characterise the optimal investment and financial policy of the firm. The results show that stakeholder firms invest more than shareholder firms, that is, over invest, and an increase of stakeholder shares increases investment, except when equity issuing firms face severe informational asymmetries or severe cost of external equity. We also discuss different approaches to model investment of stakeholder firms and their implications for empirical analysis.

CEO International Experience in Advanced Market Economies and Firm Investment Horizon in a Transitioning Economy

AbstractBuilding on the literature on managerial myopia, we investigate how chief executive officers’ (CEOs) international experience in advanced market economies affects their firms' investment horizons in a transitioning economy. To overcome myopia, CEOs should possess the knowledge needed to manage current tasks, thereby freeing up cognitive resources for future considerations. In the context of our theorizing, we argue that international experience in advanced market economies equips CEOs with knowledge about how to deal with their current tasks of market-oriented adaptation in a transitioning economy, freeing up cognitive resources for considering longer-term investment horizons. Additionally, the effect of CEO international experience in advanced market economies on firm investment horizon is stronger under conditions that increase the cognitive burden on CEOs to perform market-oriented adaptation tasks – specifically, when there is a high scope of pro-market reform, high intensity of foreign competition, analyst coverage, and a high level of institutional ownership. Our estimation based on a matched sample of 204 Chinese CEOs during the period 2002–2019 supports the majority of our predictions. Our study contributes to research on firm investment horizon, CEO international experience, and transition economies.

Does a reduction in the pension insurance contribution ratio promote firm productivity? Evidence from a quasinatural experiment in China

AbstractReducing the burden of social security contributions for firms, unleashing their vitality, and enhancing their total factor productivity (TFP) are crucial measures in China's pursuit of sustainable and high‐value‐added growth. This article utilizes three reductions in the corporate pension insurance contribution ratio in China as a quasi‐natural experiment to construct a treatment intensity DID (Difference‐in‐Differences) model. By utilizing data from listed companies between 2013 and 2020, this study empirically examines the impact of reducing the pension insurance contribution ratio on firms’ TFP while identifying the underlying mechanisms. The findings of the study are as follows: First, the policy exhibits a significant positive effect on corporate TFP in China. Second, this policy's contribution primarily stems from stimulating firms to increase their employment of highly skilled labour, elevating wages for ordinary employees, and enhancing firm investment efficiency. Lastly, the analysis of heterogeneity demonstrates that the policy's positive effect is more pronounced among non‐state‐owned enterprises, small and medium‐sized enterprises, and labour‐intensive enterprises. This study provides empirical evidence for evaluating the contribution reduction policy and serves as a policy reference for endeavours to deepen the reform of the pension insurance system and enhance pension insurance fund budget management.

Strategic impact of knowledge entrepreneurship on foreign direct investment in Nigeria

The study investigated the strategic impact of knowledge entrepreneurship on Foreign Direct investment in Nigeria. This study examined the rate of foreign Direct Investment (FDI) in Nigeria because the country has witnessed massive downward sliding of foreign direct investment in recent times. To solve this problem, this study is aimed at ascertaining the nature of impact Knowledge entrepreneurship has on foreign direct investment. The study also investigated the cause of the massive downward sliding of foreign direct investment in Nigeria. This study adopted the survey design. Simple random sampling technique was used in selecting the 200 staff of selected foreign direct investment firms in Nigeria. Findings revealed that there is a positive and significant relationship between knowledge entrepreneurship and Foreign Direct investment in Nigeria. This means that the knowledge of Foreign Direct Investment opportunity in another country will accelerate the action of the entrepreneur in taking advantage of the opportunity to make profit in that country. This is in tandem with Knowledge Spillover Theory of Entrepreneurship. Knowledge entrepreneurship has the potency to attract foreign direct investment hence the positive and significant correlation. The study also found that knowledge entrepreneurship has resulted in technological transfer to Nigeria and employment generation as well as increased profitability and market share of the FDI operating in Nigeria.The study concludes that knowledge entrepreneurship is a viable business model in Nigeria and that the reason for the massive and downward sliding of Foreign Direct Investment in Nigeria currently is as a result of the national challenges of high insecurity and exchange rate volatility.

Options trading and firm investment efficiency

AbstractWe examine the effect of options trading on an optioned firm's investment decisions. We find that active options trading improves an optioned firm's investment efficiency, and that this effect holds under several alternative empirical specifications and identification strategies, including fixed‐effects models, different matching methods, an instrumental variable approach, a Granger causality test and a quasi‐natural experiment based on the listing decisions of the options exchanges. This relation is mediated by two factors, namely, information asymmetry and uncertainty, consistent with the notion that options trading improves investment efficiency by providing information that facilitates external monitoring and managerial learning. The results of cross‐sectional analyses indicate that the effect of options trading on investment efficiency increases with firms’ tendency to overinvest or underinvest, and with managers’ risk‐taking and learning incentives. We also demonstrate that the effect of options markets on investment efficiency is distinct from the effect of stock markets. Overall, our findings suggest that options trading plays a nonnegligible role in improving an optioned firm's investment efficiency.

Sustainable digital transformation path for manufacturing outwards foreign direct investment firms: Gradual or leapfrogging

Digital transformation plays an important role in improving the efficiency of production of enterprises and can provide strong support for green and sustainable development. Compared with domestic enterprises, outward foreign direct investment (OFDI) enterprises have greater access to advanced digital technology. This paper aims to analyze the path selection of green and sustainable production for the digital transformation of manufacturing outward foreign direct investment (OFDI) companies, whether gradual or leapfrogging. However, there is a lack of systemic game mechanisms and numerical simulation methods for heterogeneous enterprises. Based on the analysis of reverse technology spillover intensity of outward foreign direct investment (OFDI) and differences in the absorptive capacity of enterprises, we have proposed the evolutionary game model for different path selection of digital transformation of manufacturing enterprises, due to heterogeneous enterprises under different spillover degrees with numerical analysis methods. The research results show that: (i) Under low reverse technology spillover intensity, all enterprises evolve to a gradual transformation path, and enterprises with weaker absorptive capacity converge faster; (ii) There is a certain threshold for reverse technology spillover. When reverse technology spillover intensity exceeds the threshold, enterprises with stronger absorptive capacity converge to a leapfrog transformation path, but enterprises with weak absorptive capacity converge to a gradual transformation path; (iii) With high reverse technology spillover intensity, all enterprises evolve toward a leapfrog transformation path, and faster convergence happens to enterprises with higher absorptive capacity. The evolutionary game path of digital transformation in manufacturing enterprises is illustrated in Fig. 1.

The transaction cost implications from business angel ownership in the Caribbean

AbstractResearch question/issueThis is a study of the relationship between business angel retained ownership in investee firms across the Caribbean region and their informational asymmetry costs captured in bid‐ask spreads.Research findings/insightsWe find business angel ownership to be associated with a reduction in transaction costs or bid‐ask spreads. However, this is reversed leading to increasing transaction costs following moderation by whether the investee firm has a subsidiary located within an offshore jurisdiction and separately if the investee firm adopts higher levels of Anglo‐American shareholder value corporate governance.Theoretical/academic implicationsWe undertake a novel application of incomplete contracting theory in theorizing the influence of ownership of business angels on the transaction costs of their investee firms. We extend and contribute to theory development through consideration of the presence of investee firm's subsidiary located in offshore financial centers within the firm's corporate network and the degree to which it adopts Anglo‐American shareholder value corporate governance. In the former, we argue business angels are more prone to collaborate with firm insiders to the detriment of outside minority investors given the enhanced opacity and shift in incentives. In the latter, we argue the incongruity between business angels, insiders, and outside minority expectations regarding the adoption of shareholder value governance also leads to elevated transaction costs.Practitioner/policy implicationsBusiness angel finance is widely lauded as a potential source of development capital within regional and developing economies with the potential to rejuvenate otherwise moribund entrepreneurial ecosystems and business sectors. Our study yields important findings relevant for practitioners in formulating development policy nurturing the development of indigenous economies through enhanced business angel participation. It also considers the moderating influence of firm's adoption of Anglo‐American shareholder value corporate governance and whether the firm has a related party located in an offshore financial center, something of profound importance in regions comprising offshore financial centers.

Overcoming the “diversification trap”:firm investment decisions and innovation under policy uncertainty

Existing research generally regards economic policy uncertainty (EPU) as a type of macro-shock and fails to distinguish the perception of policy uncertainty among different enterprises. We use a text mining tool to extract a measure of the EPU perceived by individual firms listed on Chinese stock markets from their annual reports between 2007 and 2020 to investigate the policy uncertainty's impact on enterprises' cross-regional investment and innovation. Our findings reveal the following. First, increased policy uncertainty will inhibit innovation in enterprises. Second, policy uncertainty reduces cross-regional investment, and the influence is time-dynamic and different under the heterogeneous enterprise characteristics. Third, the negative impact of policy uncertainty on cross-regional investment by enterprises is primarily reflected in investments unrelated to the enterprise's technology. Policy uncertainty will promote investment in technology-related areas. Finally, the impact of policy uncertainty and an increase in technology-related cross-regional investment will help (1) lower financing costs via the signal effect, (2) broaden knowledge, and (3) strengthen enterprise resilience and thus promote innovation.

Energy price uncertainty, environmental policy, and firm investment: A dynamic modeling approach

Environmental quality is closely related to the production and investment behavior of enterprises, which depends on the discounted future cash flows that are affected by energy price uncertainty. Meanwhile, with the increasing awareness of environmental protection, environmental policies have been introduced to restrict firm investment choices. However, the role of environmental policy has received less attention in the previous research on energy prices and firm investment. Therefore, this paper develops a dynamic firm investment model that incorporates energy price uncertainty and environmental regulation and makes the following predictions. First, ceteris paribus, energy price uncertainty negatively impacts firm investment. Second, environmental regulations mitigate this negative impact of energy price uncertainty. Third, the mitigating effect of environmental policy is greater in pollution-intensive industries. This paper merges the micro-data on A-share listed firms in China between 2004 and 2018 with the macro-data on energy prices and environmental regulation. The empirical results align with the theoretical predictions. The robustness tests, including instrumental variables, alternative measurements, and estimation methods, validate the baseline findings. These theoretical and empirical findings yield important implications for policymakers.

Country-level governance quality, foreign ownership, and firm investment: evidence from WBES database

Country-level governance quality, foreign ownership, and firm investment: evidence from WBES database