Listed US Companies Research Articles

The interplay of financial reporting quality and investment efficiency: evidence from the USA

Purpose This study aims to comprehensively examine the relationship between financial reporting quality (FRQ) and investment efficiency (IE). The central thrust of this research endeavor is to empirically analyze the impact of FRQ on diverse facets of investment, including overinvestment, underinvestment and overall IE. Design/methodology/approach Using a sample of 13,902 firm-year observations from publicly listed US companies, this study uses the generalized method of moment (GMM) in conjunction with three distinct measures for FRQ under three different investment settings, considering firm liquidity and industry performance. Findings This study offers interesting insights into the intricate relationship between FRQ and IE. The results indicate a strong positive relation between the two constructs. In particular, the research reveals a negative link between FRQ and underinvestment, and an inverse relationship between FRQ and overinvestment. These findings suggest that FRQ is one of the key drivers of IE and that by enhancing FRQ, businesses can better optimize their investments. Practical implications This study highlights the significant implication of the effect of FRQ on IE, as it enables businesses to optimize their investments by improving their decision-making processes and better risk assessment of associated projects, resulting in more efficient capital allocation. A higher degree of FRQ increases investors’ confidence in a company’s financial statements, resulting in higher liquidity. It can benefit regulators to set higher standards and promote transparency. Originality/value The study examines the relationship between FRQ and IE. The study finds a strong positive relation between FRQ and IE, with FRQ being a key driver of IE. The paper’s original contribution lies in its comprehensive examination of the complex relationship between FRQ and IE, using robust analytical techniques by applying GMM and taking into consideration firms liquidity and industry performance.

How do bankruptcy risk estimations change in time? Empirical evidence from listed US companies

The study analyzes how bankruptcy risk estimations of listed US companies changed in the period January 2006 to May 2023. Based on multi-year data series of bankruptcy risk estimations, the study shows the dynamics of bankruptcy risk estimations and, therefore, helps interpret the outcome of bankruptcy prediction models and evaluate the recent financial distress that a notable number of listed US companies exhibits. Furthermore, the study analyzes the pre-bankruptcy patterns of listed US companies that filed for bankruptcy in 2023.

How Do Women on Board Reduce a Firm’s Risks to Ensure Sustainable Performance during a Crisis?

The research applies the Upper Echelons Theory and the Lehman Sisters Hypothesis to explain how women board members use investment, financial, and liquidity techniques to reduce risk and increase a firm’s value. An original dataset of listed US companies is analyzed to show how women strategists contribute to value creation and mitigate stock volatility and bankruptcy. A simultaneous equations approach captures the interplay between a company’s use of debt and financial derivatives. According to this research, organizations that employ derivative instruments benefit more from having women in advisory roles because women encourage proactive risk management and develop effective risk control measures. The research implies that businesses should actively promote gender equality on their boards rather than merely recognizing the need for diversity.

The bankruptcy risk matrix as a tool for interpreting the outcome of bankruptcy prediction models

The study introduces the bankruptcy risk matrix. The bankruptcy risk matrix allows for a more precise identification of financially distressed companies and a more accurate interpretation of the outcome of bankruptcy prediction models as it takes into account the changes in bankruptcy predictions. Furthermore, the study applies the bankruptcy risk matrix on most recent bankruptcy risk data on listed US companies.

The bidirectional relationship between corporate social responsibility and financial reporting quality: Does gender diversity matter? Evidence from US companies

AbstractThe aim of the paper is twofold. Firstly, to analyze the bidirectional effects between Corporate Social Responsibility (CSR) and financial reporting quality proxied by earnings management (EM). Secondly, to investigate the moderating role of board gender diversity, the gender of CEO and CFO on these two phenomena. The study employs a Panel Data set of 390 listed US companies for the period 2011 to 2019 (3510 observations). To verify a two‐way relationship between CSR and EM, we estimate a system of simultaneous equations using the GMM estimator proposed by Arellano and Bond (1991). To analyze the moderating role of gender diversity, multiple regression analysis and several robustness tests such as Propensity Score Matching and DID are adopted. Empirical results confirm that US companies engaged in CSR activities are less motivated to practice EM and more likely to produce high financial reporting quality. The study confirms that Gender diversity increases board effectiveness by reducing the level of earnings management, ensuring high quality of financial reporting, and developing CSR activities. Findings are especially important for authorities who intend to impose regulatory quotas for female board membership. The policymakers should consider gender diversity in improving CSR practices for society.

Carbon disclosure: A legitimizing tool or a governance tool? Evidence from listed US companies

AbstractWe study the motivations behind and consequences of firms disclosing carbon information. Specifically, we explain the bidirectional relationship between carbon disclosure and carbon performance and examine whether carbon disclosure is used as a legitimizing tool or a governance tool. We analyze carbon emissions and disclosure data from 2012 to 2015 for a sample of S&P 500 companies. After addressing issues of endogeneity, our findings support legitimacy theory and suggest that firms tend to greenwash carbon information and use carbon disclosure as a legitimizing tool. In particular, managers strategically select particular types of carbon information to disclose to the public. Our findings also indicate that firms in low‐carbon sectors tend to use disclosure as a governance tool rather than a legitimizing tool, suggesting that firms in high carbon intensity sectors are likely to face serious legitimacy anxiety, and have stronger reasons to manage their green image. Implications of our empirical evidence for managers, investors, and policymakers are explored.

Valuing supply chain performance within and across manufacturing industries: A DEA-based approach

Managers often use financial metrics based on internal accounting data to gauge firm performance. In this paper, we analyze firm value and related levers of operational supply chain (SC) performance from a financial market perspective. This allows us to study the contributions of profitability (earns) and asset utilization (turns) as the two major drivers of firm value. For this purpose, we apply data envelopment analysis to a large-scale longitudinal dataset of listed US companies (2007–2015) that covers 13 manufacturing industries. In so doing, we shed light on the implications of the 2008/2009 financial crisis for operational SC performance. Our findings can be summarized as follows: First, earns and turns are negatively correlated from an internal accounting-based viewpoint that distinguishes ‘high earns/low turns’ from ‘low earns/high turns’ industries. Second, manufacturing companies mostly tend to be less efficient in translating earns as opposed to turns into firm value. Finally, we observe declining efficacy of approaches to value-based supply chain management in manufacturing industries since 2007 (the last year before the financial crisis). General firm value appreciation in the stock markets overcompensated for this decline until 2015.

Political alignment between firms and employees in the United States: evidence from a new dataset

AbstractI present a novel measure of partisan alignment between firms and employees. This measure is constructed using data matching 1,691,790 US federal campaign contribution filings of 85,109 individuals to the donations of 874 Political Action Committees (PACs) of publicly listed US companies between 2003 and 2016. The alignment measure shows that employee and employer contributions are highly correlated. Furthermore, firm- and occupation-level factors are significantly associated with firm–employee alignment. Uniquely, these new data can be easily linked to external data on industries, firms, and occupations and consequently allow for in-depth analysis of precisely how companies can influence employees’ politics.

“Firm size matters: Industry sector, firm age and volatility do too in determining which publicly-listed US firms pay a dividend”

The objective of this paper is to refute the claim that the propensity for listed US firms to pay dividends remains in decline. We find that almost half of all publicly listed US companies are dividend-payers at the end of 2016, even excluding non-operating companies and financials; the percentage of ‘payers’ is double the rate at the start of this century as noted by Fama & French (2001). Firm size (market value) appears to be the dominant predictor of whether a firm pays a dividend or not, followed by industry grouping, age and relative volatility. Over the last two decades, the number of listed US stocks has halved, as M&A activity outpaces new IPOs. The US listed market is now bifurcated between large-cap ‘older’ firms that typically pay dividends, and smaller-cap ‘younger’ non-payer firms, mainly dominating the Health Care industry. We also find that one-third of surviving stocks at the end of 2016 have posted negative annual geometric returns since their original listing, and that 90% of these loss-making stocks are ‘non-payers’.

'Plain English' and Say-on-Pay: Regulatory Requirements vs Potential Behavioural Consequences

Since 2011, listed US companies are required to hold an advisory shareholder vote on the remuneration of named executive officers on information provided in the Compensation Discussion and Analysis report (CD&A). While the SEC requires that the CD&A be written in ‘Plain English’, commentators relay general dissatisfaction among the investment community regarding the readability of the average CD&A (Larcker et al., 2015). Prima facie, this calls for firms to invest in improving disclosure in the CD&A. The probable consequences from this investment however, in terms of affecting the outcome of the say-on-pay vote, are far from clear. Ample evidence exists in the Psychology, Finance, and Accounting literatures which suggests that readability can affect decision making within a financial setting. Lawrence (2013) finds that individual (small) investors are attracted towards investments in firms with clearer and more concise financial disclosures and argues that readability brings informational advantages for individual investors. The readability of financial disclosures may also affect the way that investors make decisions. Research from the Behavioural paradigm document a number of observed heuristics which may guide individuals’ decision making. Rennekamp (2012) argues that readability evokes the processing fluency heuristic, whereby information is perceived to be more credible if it is provided in a more readable manner. There is a danger that if shareholders are too quick to endorse pay decisions on the basis of inflated credibility, then a culture of excessive pay may prevail relatively unchallenged. We demonstrate that CD&A readability, inversely measured using the Gunning-Fog Index, has the effect of weakening the link between an established proxy of CEO excess pay and the probability of receiving a low say-on-pay voting result (firms with more readable CD&A are less likely to receive a no vote, despite similar levels of estimated CEO excess pay). This suggests that increased readability does on average lead to shareholders placing a greater decision weight on arguments presented in the CD&A framed in favour of proposed pay. While Rennekamp (2012) demonstrates that readability of press releases affects valuations using an experimental approach we examine the impact of processing fluency in a real setting where inflated credibility of management may significantly affect the voting outcome.

Earnings management and macroeconomic crises

Purpose– The purpose of this paper is to investigate whether macroeconomic crises are a motivational factor for earnings management practices by the companies listed in the capital markets of Brazil and the USA.Design/methodology/approach– The sample consisted of 7,932 firm-quarter observations from listed Brazilian companies and 99,931 from listed US companies, covering a 13-year period (1998-2010). The authors developed regression models for the panel data, taking into account discretionary accruals as an earnings management proxy (dependent variable), while crises were regarded as a macroeconomic factor (dummy variable of interest). Also considered were return on assets, market-to-book ratio, size, leverage, foreign direct investment, income taxes, quarters, and sectors, which were treated as control variables.Findings– The results corroborate the conceptual issues involved in undertaking this study, and they demonstrate that in periods of macroeconomic crises, companies are more motivated to employ earnings management practices both in Brazil and in the USA.Originality/value– Unlike previous studies, the model developed in our research includes multiple macroeconomic crises simultaneously. Furthermore, it was applied in two markets at different stages of development and operating in distinct institutional contexts, which indicates its viability for replication for a large number of countries.

Antecedents of time to completion in mergers and acquisitions

Literature on mergers and acquisitions (M&As) performance and wealth effects is abundant. Yet, we know very little about the pre-completion stage, in particular about aspects such as the likelihood of deal closing and time to completion. Understanding the drivers of completion time is however important as prolonged deal duration is costly and postpones realizing synergy gains. In this article, we study the antecedents of deal duration for a sample of 1150 M&As between listed US companies during 1994–2011. Not surprisingly, deal complexity critically affects time to completion. Stock offers, deal hostility, mergers and larger deals are characterized by a lengthier acquisition duration. Strong and clear shareholder support accelerates deal completion, as does the likelihood of overpayment. Finally, experienced bidders succeed in more rapidly completing transactions, implying learning effects.

Can investing in corporate social responsibility lower a company's cost of capital?

Purpose– This paper aims to investigate the effect of corporate social responsibility (CSR) ratings on theex antecost of capital of more than 2,300 listed US companies in a panel from 2003 to 2010. It examines whether financial markets value continuous investment in CSR activities through higher market capitalization and lower cost of capital.Design/methodology/approach– The measure of the cost of capital reflects the perceived riskiness of individual companies expressed in the unobserved internal rate of return that investors expect to hold a risky asset. Based on descriptive portfolio estimations, panel and quantile regressions, the authors model the cost of equity capital as a function of CSR strengths and concerns obtained from the KLD-database and accounting controls.Findings– The authors show that firms' CSR strategies differ significantly across industry sectors. Customer-orientated companies such as telecommunications and automobile outperform asset-driven sectors such as real estate or chemical companies. Furthermore, the authors find a 10-bp positive effect for one standard deviation of firms' intensive allocation of resources in sustainable activities.Research limitations/implications– Since the authors are interested in the effect environmental, social and governance activities have on the firm's perceived market valuation rate, the authors apply the Fama-French model because of its efficiency in explaining realized returns, rather than incorporating analyst's long-term growth forecasts into the proxy for the equity premium.Practical implications– Managers of companies with low or intermediate CSR scores may consider the financial benefits of improving their social and environmental performance. A good starting point is usually to draw up a company-wide CSR agenda, possibly guided by a dedicated CSR task force, mapping out the potential costs and benefits of such measures. In addition, by improving their CSR ratings, a company may get access to additional resources, ranging from the growing ethical investment industry to employees for whom CSR performance matters when choosing an employer.Originality/value– The authors expand the existing literature by considering firm's CSR level to be in relation to the overall CSR performance and decompose firm's CSR agenda into strengths and concerns rather than counting the number of activities a firm is involved in. The applied methodology allows a better understanding of firm's CSR agenda and its implication for capital markets and investors on both long and short investment terms.

Can Investing in Corporate Social Responsibility Lower a Company’s Cost of Capital?

This paper investigates the effect of corporate social responsibility (CSR) ratings on the ex ante cost of capital of more than 2300 listed US companies in a panel from 2003 to 2010. It examines if financial markets value continuous investment in corporate social responsibility activities through higher market capitalization and lower cost of capital. We show that firms' sustainability strategy varies across industry sectors, whereas customer-orientated companies like telecommunications or automobile outperform asset-driven sectors such as real estate or chemical companies. Furthermore, we predict a 10-bp positive effect for one standard deviation of firms' intensive allocation of resources in sustainable activities. Managers of companies with a low or intermediate CSR score may consider improving their performance. A good starting point is usually to draw up a companywide CSR agenda, possibly guided by a dedicated CSR task force. In addition, by improving their CSR ratings a company may get access to additional resources, ranging from the growing ethical investment industry to that part of the labor force for whom CSR performance matters when choosing an employer.

Research for sale: Determinants and consequences of paid-for analyst research

I examine the determinants and market impact of paid-for coverage using a hand-collected sample of paid-for reports over 1999–2006. More than five hundred publicly listed US companies paid for analyst coverage since 1999. Yet little is known about the informational consequences of this analyst research. Firms with greater uncertainty, weaker information environments, and low turnover are more likely to buy coverage as they have the most to gain from analyst coverage but are unlikely to attract sell-side analysts. Despite the inherent conflicts of interest, I find paid-for reports have information content for investors based on 2-day abnormal returns. After the initiation of coverage, companies experience an increase in institutional ownership, sell-side analyst following, and liquidity. In addition, the results are strongest for the fee-based research firm with ex ante policies that reduce potential conflicts of interest.

Determinants of the method of payment in mergers and acquisitions

We empirically investigate the determinants of the payment form in mergers and acquisitions and introduce new variables on the target and acquirer investment characteristics to evaluate whether the concerns of target and acquirer shareholders are taken into account. Our sample encompasses mergers between publicly listed US companies from 1985 to 2004. Similarly we also consider the determinants of announcement returns using the same set of variables. We establish the relevance of a previously unreported variable for the determination of the payment form, the correlation of returns between target and acquirer, besides the more established determinants hostile takeovers, and defence mechanisms; weak evidence is found for the significance of budget constraints and no evidence for asymmetric information or tax considerations being a relevant factor. We do not find that announcement returns are explained by the variables considered.

Takeover Immunity, Takeovers, and the Market for Nonexecutive Directors

We develop and test two competing hypotheses that relate the market for nonexecutive directors to the level of external monitoring mechanism of the firms they serve. The Reward for Discretion Hypothesis posits that directors are valued more when they display discretion concerning their choice of antitakeover provision (ATP) levels rather than follow a rule. Alternatively, the CEO Risk Aversion Hypothesis implies that CEOs seek directors with inclination for uniform and high ATP levels. We examine how changes in ATP levels and approval of value creating/destroying acquisitions affect the careers of nonexecutive directors. Our results, based on data from about 3,000 listed US companies during 1994‐2003, support the Reward for Discretion Hypothesis.

Can Companies Buy Credible Analyst Research?

I examine the determinants and market impact of paid-for coverage using a hand-collected sample of paid-for reports over 1999–2006. More than five hundred publicly listed US companies paid for analyst coverage since 1999. Yet little is known about the informational consequences of this analyst research. Firms with greater uncertainty, weaker information environments, and low turnover are more likely to buy coverage as they have the most to gain from analyst coverage but are unlikely to attract sell-side analysts. Despite the inherent conflicts of interest, I find paid-for reports have information content for investors based on two-day abnormal returns. After the initiation of coverage, companies experience an increase in institutional ownership, sell-side analyst following, and liquidity. In addition, the results are strongest for the fee-based research firm with ex ante policies that reduce potential conflicts of interest.

Auditing, integral approach to quarterly reporting, and cosmetic earnings management

PurposeThis study examines the effect of auditing and the integral approach to interim reporting on cosmetic earnings management, referred by Kinnunen and Koskela as earnings manipulative behavior to report earnings numbers to achieve key cognitive reference points represented by N×10k.Design/methodology/approachUsing Benford's Law, the analysis employs 182,278 positive quarterly earnings observations and 103,470 negative quarterly observations for all publicly listed US companies from 1993 to 2003.FindingsThe empirical results show that firms tended to engage in cosmetic earnings management in each of the four fiscal quarters. More importantly, it was found that the degree of cosmetic earnings management is significantly less severe in the fourth fiscal quarter, which is the only quarter audited, than any of the previous quarters. This result suggests that the auditor plays an important role in reducing the cosmetic earnings manipulative behavior.Originality/valueThe findings of the study add more evidence to the ongoing debate about the effectiveness of auditing in preventing earnings management.

A Comment on 'The Information Content of Earnings and Prices: A Simultaneous Equations Approach' by W.H. Beaver, M.L. McAnally, and C.H. Stinson (1997)

We comment on a recent paper by Beaver, McAnally and Stinson (1997), drawing attention to the fact that their method ignores some recent developments in time-series econometrics. We apply a bi-variate vector autoregression framework to price and earnings data of listed US companies and the S&P 500 index to capture the dynamics of this system of equations. Although some series are I(1), cointegration does not exist and consequently we are unable to estimate a vector error correction model. However, by applying generalised variance decomposition and generalised impulse response analysis, we conclude that evidence favours a linkage from prices to earnings.