Long-term Firm Performance Research Articles

Industrial policy and the creation of new industries: evidence from Brazil's bioethanol industry

Industrial policy programs are frequently used by governments to stimulate economic activity in particular sectors of the economy. This study explores how an industrial policy program can affect the creation and evolution of an industry and, ultimately, the long-term performance of firms. We examine the history of the Brazilian bioethanol industry, focusing on the industrial policy program implemented by the Brazilian government in the 1970s to develop the industry. We put together a novel data set containing detailed information about the history of bioethanol producers. Our findings show that plants founded during the industrial policy program tend to be, in the long run, more productive than those founded before the program was in place. Based on additional analyses and complementary fieldwork, we infer that the wave of acquisitions that occurred after the end of the industrial policy program had an important effect on the performance of the plants founded when the program was in place. Industrial policy, especially in conjunction with a competitive post-industrial policy business landscape, can succeed in nurturing competitive firms.

Division Buyout and Refinancing of Event Risk Covenant Bonds: Evidence from the Long-Term Stock Performance

The focus of this paper is to assess the long-term common stock performance of the parent firms that underwent divisional buyout (DBO) and had event risk covenant (ERC) bonds outstanding at the announcement of the DBO. The final sample of 46 parent firms exhibit a common characteristic where all the ERC bonds were redeemed (either called above par or put on the firm at par) or restructured at a higher cost to the firm around DBO announcement date due to the presence of ERCs. ERCs are triggered since the parent firms that divest their assets through a DBO reveal future cash flow volatility, which has potential to lower the value of existing bonds. This refunding of the bonds leads to costly refinancing for the parent firms, which has long-term implications. I find significantly negative cumulative abnormal returns at the issue date of the ERC bonds for these firms due to potential managerial entrenchment and foregone transfer of wealth from bondholders to stockholders. Consistent with the finance literature, I find significantly positive cumulative abnormal returns for parent firms at the announcement of the DBO. These positive short-term returns at the announcement do not translate into long-term positive returns. The common stock of these parent firms significantly underperforms the market over the periods three, four, and five years after the DBO date. This dichotomy can be attributed to the security market overreaction to the announcement of DBO. The long-term underperformance can be attributed to the costly refinancing of the ERC bonds.

The impact of technology-motivated M&A and joint ventures on the value of IT and non-IT firms: a new examination

We extend Lee and Lim (Rev Quant Financ Account 27:111–123, 2006) who provide empirical evidence on the impact of mergers and acquisitions (M&As) and joint ventures on the value of information technology (IT) and non-IT firms. Using technology-motivated transactions, we examine whether there are differences in market response to the announcement of M&As and joint ventures, and we consider the long-term performance of such firms. We find the market provides no (positive) reaction to joint ventures (M&As) at the announcement. We also present new evidence suggesting the market reacts more favorably to the announcement of technology M&As relative to joint ventures for our full sample, IT sample and non-IT sample. However, our examination of these firms’ long-term performance suggests the initial reaction is not fully supported. The findings suggest improved (declining) operating performance for joint venture (M&A) firms, and evidence to conclude joint venture firms achieve superior long-term performance changes for both accrual- and cash-based measures. To explain these inconsistencies, we employ a set of control variables previously documented as determinants of the innovation ownership decision. For joint venture firms, we find that, while the market fails to consider the importance of the firms’ R&D intensity and growth prospects in its initial reaction, these are ultimately key indicators of their future performance. The evidence also suggests the market overreacts to M&A announcements because it over-weights the impact of R&D intensity on the firms’ future performance in its initial response.

Ownership structure and acquirers performance: Family vs. non-family firms

This paper investigates the impact of family control on French acquirers' performance. We consider a sample of 239 acquisitions undertaken by French listed companies between January 1997 and December 2006. Comparing both, short-term and long-term performance, we find that family-controlled firms outperform non-family firms. We find that the relationship depends on the control level. The higher operating performance of family firms is statistically significant for an intermediate level of control. Around the announcement date, family firms with a high level of control outperform non-family firms. Using the calendar time approach, we find that long-term stock performance of family firms is positive and statistically significant. Robustness tests show that our findings seem to not be driven by the endogeneity problem. Finally, we find that family wedge, due to the use of the pyramidal structure and the double voting rules, has no statistical significant effect.

Steady as She Goes: Female Board Representation and Corporate Mergers and Acquisitions Activity

This study contributes to the current discussion on board gender diversity by providing a comprehensive examination of the impact of female board representation on firm-level strategic behavior. Focusing on the domain of mergers and acquisitions (M&A), we build theory based on psychological, social, and cognitive mechanisms to predict that firms with female directors will be associated with more cautious, less aggressive M&A behavior. In particular, we hypothesize and find evidence that firms with female board representation tend to engage in acquisitions that are fewer in number, smaller in size, cash- (vs. equity-)funded, and more diversified. Contrary to our prediction, we find that female board representation is associated with higher bid premiums (i.e., increased overpayment). In supplementary analyses, we find no significant positive or negative impact of female-represented boards on short-term market reaction to acquisitions (cumulative abnormal returns) or long-term firm performance. We demonstrate the robustness of our findings through the use of a difference-in-difference analysis of a sub-sample of firms that experienced exogenous changes in board gender composition as a result of director deaths.

On the importance of forest assets for micro-firm performance

Business start-ups are on the increase, a development which is accompanied by hopes that these new firms will generate a potential for, e.g., local and regional development and a strengthening of local labour markets as well as the national economy. However, the long-term performance and viability of new firms are often rather poor. This research aims to analyse the importance of access to assets in the form of forest holdings for the performance of Swedish micro-firms. The analyses are based on official register data and fixed-effects panel regression modelling. A hypothesis is that a firm whose owner also possesses forest holdings is more viable thanks to the different resources (in the form of capital from logging or mortgaging, or non-pecuniary other values) the forest holdings may provide, and which possibly contribute to the firm’s economic stability and resilience to economic fluctuations. From a general point of view, we find support for the hypothesis that forest assets positively and significantly influence firm performance in terms of earnings before interest and taxes (EBIT), but not in terms of value added. Access to forest assets is never detrimental to firm performance, although it does not have a significant positive effect in all sub-categories of entrepreneurs based on different combinations of age, gender and firm type. Particularly, the economic performance of private firms run by older men benefits from resources stemming from their forest holdings. No significant effects were found for female entrepreneurs or for limited companies. As regards regional variations, firms located outside the metropolitan regions – as compared to those at the top of the urban hierarchy – are likely to perform better, thus indicating that local development may benefit from resource transfers from the forest sector to micro-firms engaged in non-primary activities.

CEO Pay and the Market for CEOs

Competitive sorting models of the CEO labor market (e.g., Edmans, Gabaix and Landier (2009)) predict that differences in CEO productive abilities, or talent, should be an important determinant of CEO pay. However, measuring CEO talent empirically represents a major challenge. In this paper, we document reliable evidence of pay for CEO credentials and argue that the evidence is consistent with models of the CEO labor market. Our main finding is that boards' compensation decisions reward several reputational, career, and educational credentials of CEOs, with newly-appointed CEOs earning a 5 percent ($280,000) total pay premium for each decile improvement in the distribution of these credentials. Consistent with boards using credentials as publicly-observable signals of CEO abilities, we show that pay for credentials displays key cross-sectional features predicted by theory, such as convexity in credentials and complementarity with firm size. Our main finding is robust to a battery of identification tests that address selectivity and endogeneity concerns, including instrumental variables estimates and controlling for firm and CEO fixed effects. We also show that credentials capture variation in CEO human capital that is different from lifetime work experience, and are positively related to long-term firm performance and board monitoring, which helps to distinguish our results from alternative stories based on CEO general human capital, hype, and entrenchment. Overall, our findings suggest that sorting considerations in the CEO labor market are an important determinant of CEO pay. Our results also suggest that the rise in CEO pay over the last decades may owe at least in part to a rise in the CEO talent premium.

Validating Antecedents of Customer Loyalty for Indian Cell Phone Users

The Indian telecom industry is one of the fastest growing in the world and second largest mobile market globally. The Indian cell phone market is characterized by a large subscriber base (545 million connections as on May, 2010, expected to reach 876.6 million in 2013), low average revenue per user (INR 209 as on March 2009) and high churn rates (53.2% in 2009, and is expected to increase to 59.6% in 2013). The Indian consumers are enjoying a wide range of services along with the world�s lowest local call rates. The mobile phone operators in India are faced with the challenge of reducing customer churn in the ever-increasing prepaid subscriber market. Under such circumstances, the success of mobile phone service providers in India mainly depends on developing innovative schemes to increase customer loyalty. In service organizations, customer loyalty is considered as prime determinant of long-term financial performance of firms. One of the crucial issues of today is to understand how or why a sense of loyalty develops in customers. Loyalty definitions and metrics are mostly in behavioural and attitudinal terms. Consensus is absent in the marketing literature on how loyalty should be conceptualized and measured in the service industry. The present study addresses both the conceptual and measurement issues related to customer loyalty amongst the cell phone users. Building on existing literature, the antecedents of customer loyalty are reassessed in a service setting namely, customer satisfaction, trust, commitment, corporate image, and switching costs. This paper reports the development and validation of scales for measuring customer loyalty and its antecedents. The scale development and validation process was divided into three phases. Phase 1 consisted of the item generation process, assessment of content validity, and initial purification of measures. Item analysis and exploratory factor analysis were used on data collected from 250 postgraduate business students of a major university in India for initial purification of the instrument. In Phase 2, additional data were collected from 855 cell phone users in northern India to assess the latent factor structure through confirmatory factor analysis. In Phase 3, the discriminant validity and convergent validity of the measures were established. The managerial implications of the major findings of this study are as follows: It contributes to the existing literature by developing a theory-based framework for understanding the direct effects of satisfaction, trust and commitment, switching costs and corporate image on behavioural and attitudinal loyalty. By measuring loyalty as composite measure consisting of both behavioural loyalty and attitudinal loyalty, it provides evidence of the multidimensional nature of loyalty construct. Using data collected from mobile phone users, the reliability and validity of the scale are established. The newly refined and validated measures can be used by future researchers to study customer loyalty and its antecedent factors. The loyalty measures developed in this study provides managers with an easy tool to identify attitudinal and behavioural differences among customers. Marketing managers can draw meaningful distinctions between customers who buy out of habit and those who buy because of emotional attachment to the company.

How Bank Health Affects Capital Structure and Performance of IPO Firms? - Evidence from the Japanese Financial Crisis

This paper investigates whether the health of a bank affects the client firm’s capital structure and then leads to inefficiency in the client firm’s decision-making. Using the Japanese IPO dataset from 1996 to 2005 when bank sectors suffered liquidity shortages and IPO booms occurred at the same time, our empirical study reveals the following findings. First, we find that IPO firms whose main bank’s health is worse have greater financial leverage. Second, such IPOs, with unhealthy banks, raise more proceeds at the time of the IPO, and the probability of SEO within three years is high. Last, we find that such over-lending by the poor-health bank leads to higher cost of capital, and the subsequent long-term stock performance of firms with poor-health banks is worse. Overall, our empirical results reveal that the health of a bank affects its client firms’ capital structure and can lead to inefficiency in their client firms’ behavior.

Heroes Today - But What about Tomorrow? Gazelles and Their Long-term Performance

Young high-growth firms, or gazelles, have been investigated predominantly with respect to their outstanding short-term performance. The paper at hand adopts a different approach by analyzing the long-term performance of such firms to shed light on the sustainability of these job-creating machines. Using the Danish Integrated Database for Labour Market Research, we find that former gazelles are not able to sustain their headstart in terms of performance in the long run. We demonstrate that gazelles are often outperformed by initially slower growing competitors, as high initial growth negatively affects a firm’s long-term survival. We also find that high-growth start-ups ultimately achieve lower employment growth and higher employee turnover. We explain these counterintuitive findings by arguing that an initial period of rapid employment growth impedes the emergence of a stable and efficient routine structure within the newly founded venture if expansion is undertaken too hastily. In turn, this impediment decreases these firms’ long-term performance, as the initial set of structures and routines or the lack thereof has a long-lasting effect on the organization’s development.

Is Business Group Structure Inefficient? A Long‐Term Perspective

AbstractThis paper investigates the long‐term value implication of business group affiliation. In order to secure comparability between business‐group‐affiliated firms and independent firms we employ the matching estimator technique, which selects firms with business characteristics most similar to chaebol firms to create a control group of firms. We find that the long‐term performance of chaebol‐affiliated firms is superior to that of control firms although the two groups are very similar at the beginning of the sample period. The differential performance between the two groups has been caused by changes in firm characteristics over time. Difference‐in‐difference estimators on important firm characteristics indicate that, over time, chaebol‐affiliated firms become larger and more profitable, grow faster with more investments, have higher debt, and have more foreign ownership, which leads to a larger firm size. Chaebol firms also seem to benefit from tax shield and monitoring effects due to a higher level of debt, and avoid the entrenchment of owner–managers with a higher foreign ownership. However, regressions using difference variables indicate that business group affiliation by itself is not a value‐increasing event.

Board Independence and Long-Term Firm Performance: The Initial Quest of Effective Board Paradigm - A Survey Based on Nonlinear Regression Equation Modeling

We investigate the relationship between board independence and firm’s long-term performance, as measured by Tobin’s q. In a longitudinal sample of 1,143 firms in the S&P 1500 list from 1997 through 2006, we find some evidence of a significant nonlinear relationship. Two of three nonlinear models we hypothesized have been supported, one is inverted U-shaped, and other is steeple-shaped, that means q first increases, then declines as board independence rises. Thus, the controversy between conventional wisdom and Bhagat and Black (2001) is merged into a complementary model by this work. Unfortunately, the three-stage model cannot be conducted as a similar relation.

CEO Pay and the Market for CEOs

Competitive sorting models of the CEO labor market (e.g., Edmans, Gabaix and Landier (2009)) predict that differences in CEO productive abilities, or 'talent,' should be an important determinant of CEO pay. However, measuring CEO talent empirically represents a major challenge. In this paper, we document reliable evidence of pay for CEO credentials and argue that the evidence is consistent with models of the CEO labor market. Our main finding is that boards' compensation decisions reward several reputational, career, and educational credentials of CEOs, with newly-appointed CEOs earning a 5 percent ($280,000) total pay premium for each decile improvement in the distribution of these credentials. Consistent with boards using credentials as publicly-observable signals of CEO abilities, we show that pay for credentials displays key cross-sectional features predicted by theory, such as convexity in credentials and complementarity with firm size. Our main finding is robust to a battery of identification tests that address selectivity and endogeneity concerns, including instrumental variables estimates and controlling for firm and CEO fixed effects. We also show that credentials capture variation in CEO human capital that is different from lifetime work experience, and are positively related to long-term firm performance and board monitoring, which helps to distinguish our results from alternative stories based on CEO general human capital, hype, and entrenchment. Overall, our findings suggest that sorting considerations in the CEO labor market are an important determinant of CEO pay. Our results also suggest that the rise in CEO pay over the last decades may owe at least in part to a rise in the CEO talent premium.

Corporate Culture and Behaviour: A Survey

Drawing on the literature on organizational psychology, this paper discusses the potential of studying corporate culture and organizational behaviour for financial supervision. First, we discuss how corporate culture is often linked to long-term firm performance. From that perspective, factoring in corporate culture seems worthwhile. Second, the literature on organizational psychology suggests many pitfalls regarding leadership and group decision-making, which would be relevant to monitor. The realization that these mechanisms may materialize seems an important starting point for supervision. Finally, behaviour is often driven by deeper norms and values. To understand these mechanisms, interviews and survey questionnaires would be useful instruments.

Long Term Performance and Choice of SEO Method by UK Firms

Abstract: The long term performance of firms making seasoned equity offerings (SEOs) in the UK, in an era of discretion over the choice of issue method, is shown to differ according to the chosen method across a number of different models of expected returns. The combination of prior and post‐SEO performance suggests that rights offering firms are less likely to time offers to exploit overvaluation than firms using placings. When judged on a long term basis rights offering firms are not of lesser quality than firms that choose other offering methods.

CEO Outside Directorships and Firm Performance: A Reconciliation of Agency and Embeddedness Views

A debate surrounds CEO outside board service and its contribution to firm performance. Agency scholars contend CEO outside directorships constitute a form of managerial opportunism that potentially detracts from internal responsibilities, but embeddedness scholars argue that directorship ties afford access to information and resources of important strategic utility. In an effort at reconciliation, we propose and test a midrange, contingency-based model receiving strong support in analysis of more than 400 large firms. CEO outside directorships are positively related to the long-term performance of firms facing competitive constraints on growth. They also benefit strategically focused firms more than highly diversified ones.

CEO Education, CEO Turnover, and Firm Performance

This paper analyzes the relationship between CEO education, CEO turnover and firm performance. Our primary interest is on the role that CEO education plays in a firm's decision to replace its current CEO, the role that it plays in selecting a new CEO, and on whether CEO education significantly affects performance. We use six main measures of CEO education: whether or not the CEO attended a Top-20 undergraduate school, whether or not the CEO has an MBA, law or masters‟ degree, and whether or not the MBA or law degree is from a Top-20 program. Our study includes more than 14,500 CEO-years and more than 2,600 cases of CEO turnover from 1993-2007. Our results show that CEO education does not play a large role in the decision by a firm to replace its current CEO; poorly performing CEOs are replaced, regardless of their education. Education, however, does play a significant role in the selection of the replacement CEO; there is a significantly positive correlation between the education levels of new CEOs and those of the CEOs they replace. Further, hiring new CEOs with MBA degrees leads to short-term improvements in operating performance. We, however, do not find a significant systematic relationship between CEO education and long-term firm performance. CEO education does not seem to be an appropriate proxy for CEO ability. Our results lead to the puzzling implication that, while CEO education appears to play an important role in the hiring of CEOs, it does not affect the long-term performance of firms.

Customer Satisfaction Heterogeneity and Shareholder Value

It is widely recognized that business growth and shareholder value are engineered on the basis of investments aimed at acquiring and retaining customers. Along with this premise, however, the literature reveals a growing recognition that the manner in which important customer-based outcomes are constructed in the short term has vital implications for long-term firm performance. Adopting the view that customer satisfaction is a stochastic marketplace asset, the authors advance a mean-variance perspective that enables them to test two conjectures: (1) Objective service quality and advertising affect not only the level of customer satisfaction but also the heterogeneity in customer satisfaction, and (2) shareholder value is shaped by the interplay of satisfaction level and heterogeneity, through their impact on retention sales, acquisition sales, and servicing costs. The authors test these conjectures using secondary data from diverse sources that describe the dynamics in the U.S. airlines industry during a nine-year period (1997–2005). The results, derived from estimating structural models that account for the impact of several meaningful control variables, provide strong support for both conjectures. Importantly, the findings indicate that the return on satisfaction to shareholder value decreases by almost 70% in going from low to high satisfaction heterogeneity; at the same time, increasing levels of satisfaction heterogeneity serves to reduce the volatility in shareholder value.

Underwriter reputation and IPO issuer alignment 1981–2005

Abstract We examine the long-term performance and characteristics of firms that went public from 1981 to 2005. We find that long-run returns declined and the proportion of failed and failing firms increased with underwriter reputation. The IPOs marketed by the more reputable underwriters were more likely to fail or be failing in the post-1980s period, but were still better than those of less reputable counterparts. The characteristics of the firms marketed by the more reputable underwriters did not appear to change substantially from decade to decade. We conclude that external market forces rather than conscious changes by underwriters caused the shift in the relation between failure rates and underwriter reputation from the 1980s to the subsequent period. We also find the “flip” in relationship between underwriter reputation and initial IPO return identified in the literature disappears after controlling for additional factors.

Are stocks dumped or neglected by analysts' inferior investments to covered stocks?

We compare the long-term stock price and operating performance of firms that are followed by analysts to those that are not over the period of 1994–2005. While analysts are skillful in identifying quality firms for coverage, the market is efficient in pricing both covered and neglected stocks such that risk-adjusted stock returns are compatible between the two groups. However, dumped stocks consistently outperform covered stocks with significant risk-adjusted returns across different market conditions and regulatory environments. Hence, investors might earn better returns by investing in dumped stocks, but the higher returns may represent compensation for greater search costs and information risk associated with investing in these stocks.