Large Australian Firms Research Articles

Discount Rates in Disarray: Evidence on Flawed Goodwill Impairment Testing

Carlin and Finch, this issue, compare goodwill impairment discount rates used by a sample of large Australian firms with ‘independently’ generated discount rates. Their objective is to empirically determine whether managers opportunistically select goodwill discount rates subsequent to the 2005 introduction of International Financial Reporting Standards (IFRS) in Australia. This is a worthwhile objective given that IFRS introduced an impairment regime, and within this regime, discount rate selection plays a key role in goodwill valuation decisions. It is also timely to consider the goodwill valuation issue. Following the recent downturn in the economy, there is a high probability that many firms will be forced to write down impaired goodwill arising from boom period acquisitions. Hence, evidence of bias in rate selection is likely to be of major concern to investors, policymakers and corporate regulators. Carlin and Finch claim their findings provide evidence of such bias. In this commentary I review the validity of their claims.

Discount Rates in Disarray: Evidence on Flawed Goodwill Impairment Testing

Discount rate selection represents a centrally material factor impacting valuation models. Given the strong reliance on discounted cash flow modelling as a basis for determining an assets recoverable amount, the judgement exercised by reporting entities regarding rate selection is of paramount importance in influencing the outcomes of the impairment testing process conducted under IFRS. The discretion surrounding rate selection could be used opportunistically to avoid impairment losses at the detriment of transparency, comparability and decision usefulness. The objective of the study is to compare the discount rates disclosed by a sample of large Australian firms with independently generated discount rates.

Advance Australia Fair: The Quality of AASB 136 Fair Value Disclosures Down Under

The introduction of an impairment test for goodwill under IFRS is seen as another step toward moving financial accounting and reporting from its traditional historical cost paradigm to one of fair value. This regulatory change has been the subject of a growing body of literature which has often criticised many of the technical aspects of the new standard and highlighted the increased discretion it has afforded managers in the determination of periodic profit. One example of this increased discretion is the opportunity to undertake an impairment test using a methodology based on value in use or fair value less cost to sell. While previous empirical studies examining the contemporary practice of goodwill impairment testing in Australian have focused on the large number of firms that have elected a value in use methodology, this paper examines the less popular practice of impairment testing using fair value less cost to sell by drawing from a sample of 200 of the largest Australian firms. One average, these firms tended to have greater levels of goodwill suggesting a higher potential sensitivity to impairment losses, yet they recorded a lower incidence of impairment recognition compared to those firms using a value in use methodology. Our analysis also identifies a systematic failure among these firms to comply with the basic disclosure requirements required under the standard which increases the likelihood of unverifiable estimates polluting financial statements. Our results assist in understanding the impact the introduction of IFRS brings to the reliability of financial reporting in Australia, and identifies issues that may assist regulators and standard setters in shaping future policy.

Is Firm Productivity Related to Size and Age? The Case of Large Australian Firms

We investigate the relationship between productivity, size and age of large Australian firms employing more than 100 employees or holding assets in excess of $100 million. In addition, we also investigate the extent of productivity persistence among these firms by looking at transition matrices of productivity distribution and productivity-rank mobility. The empirical study is based on the IBISWorld database used to estimate translog cost function to measure (a residual based) productivity. We find evidence, though somewhat weak, that larger and older firms are on average less productive. Further, we find strong evidence for a high degree of inertia in terms of productivity ranking within an industry.

Australian CEO Compensation: The Descriptive Evidence

CEO compensation has been well documented in the US in the academic and professional literature. However, despite widespread attention by the Australian business community and the federal government to this issue, descriptive evidence on Australian CEOs' compensation contracts is very sparse. Using a sample of large Australian firms for three years, this study provides the first detailed descriptive evidence on both the levels and structures of Australian CEO compensation. The study compares these findings with those from the US and reveals significant variations in CEO compensation contracts between the Australian and US markets.

Corporate Governance, Cost of Capital and Performance: Evidence from Australian Firms

Using a sample of large Australian firms from 1994 to 2003, we show that variation in firm-level corporate governance mechanisms plays an important role in explaining a firm's cost of capital. Our empirical results show that greater insider ownership, the presence of institutional blockholders and independent boards all serve to reduce the perceived risk of a firm, thereby leading investors to demand lower rates of return on capital provided. This highlights the important role that corporate governance plays in creating value for shareholders by reducing the cost of external financing. Given the inconclusiveness of existing literature that uses Q to measure firm value, this research provides an alternative and potentially more suitable way to investigate the impact of corporate governance on firm value.

Administrative Heritage: An Exploratory Study of Large Australian Firms

In this study we address the existing gap in the literature on the strategic evolution of Australian MNCs and the effect their administrative heritage, developed in the domestic market, had on their ability to compete internationally. We explore the administrative heritage of eleven large Australian-owned firms in four industries and conclude that these firms had a distinct administrative heritage—domestic portfolio mentality and reliance on strategic assets for competitive advantage, coupled with limited FDI traditions. We contend that the firms' administrative heritage explains in part their lack of success in international markets. Our findings support the propositions advanced by other scholars (e.g. Bartlett & Ghoshal 1989; Collis 1991) that a firm's administrative heritage establishes unique constraints on strategic choice.

Board Structure and Firm Performance: Evidence from Australia

ABSTRACTThe influence of corporate governance on firm performance has been discussed for a number of years, but mainly in a United States and European business context. This article investigates the composition of boards of directors in large Australian firms and analyses whether board structure has an impact on performance, as measured by return on equity and market-to-book value ratio. The results showed that outsider ratio and female director ratio were positively associated with firm performance, whereas board size and directors' age had no influence on firm performance.

Board Structure and Firm Performance: Evidence from Australia

ABSTRACTThe influence of corporate governance on firm performance has been discussed for a number of years, but mainly in a United States and European business context. This article investigates the composition of boards of directors in large Australian firms and analyses whether board structure has an impact on performance, as measured by return on equity and market-to-book value ratio. The results showed that outsider ratio and female director ratio were positively associated with firm performance, whereas board size and directors' age had no influence on firm performance.

Innovation and Performance: Benchmarking Australian Firms

AbstractThis article empirically analyses the link between innovation and performance using a sample of large Australian firms, with a specific aim of developing benchmarking tools. Innovation is measured by firms' investment in R&D and applications for patents, trademarks and designs. An innovation index is constructed to provide one method of benchmarking. The index incorporates a firm's innovative activities into a single figure after accounting for firm size. The index provides a ranking of the most innovative firms in Australia. A second method of benchmarking uses a stochastic production frontier. This type of analysis identifies the firms which are located closest to a ‘best practice innovation frontier’.

Managing Multinational Expansion and Related Diversification: The Case of Australian Consolidated Industries Ltd, 1939–72

This case study of Australian Consolidated Industries Ltd (ACI) adopts a Chandlerian framework to assess the management of its long‐term growth strategies. ACI’s multinational expansion in South–East Asia and its related diversification in the Australian packaging industry are examined. Contrary to established views regarding Australian manufacturers, management vigorously implemented Chandlerian growth strategies, but was less effective in developing managerial capabilities and implementing an appropriate organisational structure to support its strategies’ long run expansion. Management failed to anticipate the demand for managerial resources, encountered organisation design problems, and undermined design efficiency through interventionist procedures. These explanations may shed light on a problem common among some large Australian manufacturing firms.

The Influence of Diversification and Market Structure on the R&D Intensity of Large Australian Firms

This article empirically investigates the determinants of R&D intensity for large Australian firms (1994–1997). The results indicate that more focused firms have higher R&D intensities and that lower levels of industry competition are associated with lower R&D intensities.

Market Value, R&D and Intellectual Property: An Empirical Analysis of Large Australian Firms

This paper considers the value of innovation to large Australian firms. Specifically, we investigate how R&D and intellectual property activity influences the market value of firms, using a Tobin’s q approach. R&D data are available for the period 1994–96 and data on patent, trade mark and design applications for 1996. The findings suggest that R&D and patent activity are positively and significantly associated with market value. The results also suggest that private returns to R&D in Australia are low by international standards.

The Role of Market Share and Concentration in Firm Profitability: Implications for Competition Policy

This paper analyses empirically the relationship between market share and profitability in a sample of 722 large Australian firms. This issue is linked to merger policy in Australia since the Australian Competition and Consumer Commission (ACCC) guidelines state that, in many cases, creating a market share in excess of 40 per cent is a reason for an investigation. Using the most up-to-date Australian firm-level data, it is shown that profitability tends to rise when market share exceeds 30%. This result suggests that the merger policy guidelines are broadly in agreement with empirical evidence. However, the empirical results suggest a U-shaped relationship between market share and profitability, with profitability first declining and then rising. This result challenges traditional theory and suggests that the market share to profitability relationship is complex.

Adoption and benefits of management accounting practices: an Australian study

This article uses a survey to identify the extent to which Australian manufacturing firms have adopted certain traditional and recently developed management accounting practices, the benefits received from those practices and the intentions to emphasize certain management accounting practices in the future. The findings indicate that, overall, the rates of adoption of traditional management accounting practices were higher than recently developed techniques. However, newer techniques, such as activity-based costing, were more widely adopted than found in prior surveys. Also, the benefits obtained from traditional management accounting techniques were higher than those of newer techniques. The evidence suggests that the majority of large Australian firms have adopted a range of management accounting techniques that emphasize non-financial information, and take a more strategic focus.

Third party logistics services usage by large Australian firms

Provides information relating to the experiences of Australian firms using third party logistics services (outsourcing of logistics functions being a business dynamic of growing importance in Australia). Presents conclusions from a survey showing that many of Australia’s largest firms utilize the services of contract logistics providers and some other firms are considering doing so. Provides insights in planning for implementation, for example, the need to educate the third party logistics services provider about the firm’s requirements and also information for the providers of the services.

Strategic planning in large tourism firms: an empirical analysis

It has been suggested that tourism businesses lag behind manufacturing firms in the use of strategic planning. Since tourism firms are no less vulnerable to environmental threats than manufacturing firms, it is hypothesized that strategic planning procedures adopted by tourism firms are of equal sophistication to those used by manufacturing firms. This hypothesis was tested on data from a small sample of large Australian firms. The results support the view that tourism firms have well-developed strategic planning processes. The implications of the results are discussed.

Do Union Voice and Worker Participation Coincide? A Study of Australian Managers' Perceptions

This paper examines the relationship between employee, union delegate and union official influence over managerial decision-making, using survey responses from 249 workplace managers from large Australian firms. By applying indicators of influence at different levels of aggregation, a strong positive linkage between voice and participation is located. Further, it is found that employee participation is more closely linked to voice exerted by workplace union delegates as opposed to full-time union officials, and the areas where delegates and officials maintain influence are generally identical to the areas where employees exert influence.

Enterprise Bargaining: The BCA's Report on Industrial Relations Reform

The Business Council of Australia's report on industrial relations argues that the major barrier to the competitiveness of large Australian firms is the centralized system, which hosts a fragmented structure of awards and unions that is out of touch with the requirements of corporate management and inconsistent with employee needs. We examine the various elements of the research underlying the Business Council report and show that the report's conclusions are either not supported by the evidence or greatly overstated. A shift towards unregulated decentralized bargaining, as favoured by the report, would probably yield less benefit than the present direction of reform through the award restructuring process within the context of a centralized framework. We conclude that the report diverts attention from the many factors that will determine the future competitiveness of Australian firms and that it serves as a warning about the limitations of sponsored research.

Some Elements of Organisational Control in Australian Divisionalised Firms

The extent of divisionalisation in large Australian firms and control characteristics of divisionalised firms are examined. The study investigates practices in areas of diversification strategy and organisational structure. Control characteristics of divisionalised firms considered important in literature related to divisionalised control are examined. The influences of certain contextual factors on examined characteristics are considered.