Lower Firm Performance Research Articles

CORPORATE GOVERNANCE AND PERFORMANCE: THE WEAKEST LINK?

ABSTRACT We examined the impact of corporate governance on firm performance using a sample of Canadian firms listed on Toronto Stock Exchange over the period 2002-2005. We first identified a group of firms showing a high performance as defined by return on equity (ROE) higher than 10 % in at least four consecutive years. We then compared this group with a second group composed of the other firms (low performance firms). The univariate analysis has revealed that the high performance firms are larger in terms of size, have better governance as measured by a score index, and have a higher debt ratio as well as a lower risk. We also conducted multivariate analysis by testing a regression where all the variables are included in the same model. Interesting empirical results emerge: high performance seems to be statistically and significantly explained by firm size and market risk, the impact of corporate governance is not significant. Our empirical results could be explained by different ways. First, corporate governance plays a little role in explaining corporate profitability. The latter seems to be related to economic fundamentals. Indeed, higher profits of larger size firms could be justified by economy of scale, entry barriers, and capital market imperfections and, as shown by Caves and Porter (1977) and Porter (1979), by strategic groups. Keywords corporate governance, performance, agency costs.

That Should Be Me: How Minority CEOs Get Blamed for Low Firm Performance by Other CEOs & Journalists

This study explores the potential for social discrimination in the attributions that top executives make about the performance of other firms with minority CEOs in their communications with journal...

Competitive priorities in Malaysian service industry

PurposeThis study attempts to explain the components of competitive priorities of Malaysian service firms and to find out the competitive priorities of different service industries in Malaysia, and how these competitive priorities change across “low performance” and “high performance” service industries.Design/methodology/approachAn empirical study of 254 firms from nine different service industries is conducted to answer the objectives of this study.FindingsFour competitive priorities are identified: cost, quality, delivery and flexibility. Six service industries namely fast food, hospital, retail store, bank, private college and accountant industries are found to be focused on quality while three industries namely hotel, auto‐repair and architect prioritized delivery. For both high performance and low performance firms, quality remained the top competitive priority followed by delivery, flexibility and cost.Originality/valueThis is the first study that identifies competitive priorities in the Malaysian service sector

Zero inventory and firm performance: a management paradigm revisited

According to the ‘zero inventory’ paradigm, inventory reflects waste and should be eliminated in order for performance to rise. In this study, we investigate the effect of inventory holding on firm performance, analysing 3057 firm years of data. Interpreting performance as a function of inventory, results show that firms with the lowest inventory have the worst performance (and vice versa). When understanding inventory as a function of performance, results indicate that low-performing firms carry the least inventory, whereas high-performing firms have the highest stocks. Besides questions of causality, our results do not support a paradigm which suggests that firms should move toward zero inventory.

Classified boards, the cost of debt, and firm performance

This paper documents that classified boards substantially reduce the cost of debt. The evidence is not consistent with the argument that bondholders benefit from board classification because they are concerned about hostile takeovers. Instead, the results suggest that the lessened concern for takeovers associated with a classified board structure reduces managerial risk-taking, and increases managerial incentive for financial disclosure, with both effects inuring to bondholders’ benefit. Consistent with prior literature, classified boards on average are associated with a lower firm performance. However, under the circumstances that the agency conflict between shareholders and bondholders is severe, the performance effect of classified boards appears benign.

Does liquidity risk explain low firm performance following seasoned equity offerings?

A seasoned equity offering (SEO) can improve a firm’s stock liquidity and lower its cost of capital. This paper examines whether SEO firms achieve a liquidity gain and the sources of this gain. It explores the role of liquidity risk in explaining SEO long-run performance. The evidence shows that SEO firms experience significant post-issue improvements in liquidity and reductions in liquidity risk. Size and book-to-market matching fails to control for these liquidity effects, generating the low long-term post-SEO performance documented in the literature. After adjusting for liquidity risk, SEO firms show normal long-term performance.

Business Exit and Strategic Change: Sticking to the Knitting or Striking a New Path?

The purpose of this study is to examine the potential of business exit for initiating strategic change in divesting parent firms. In contrast to prior literature that mainly investigates the impact of different antecedents on the likelihood of business exit in general, this study additionally tests the influence of these antecedents on the choice between two exit types with a cross‐industry sample of divesting firms listed in the German CDAX over the time period 1999–2004. A divestiture involving strategic change is a strategic business exit; otherwise it is denoted as status quo preserving. The findings reveal that a relatively highly dissipated focus does not automatically enhance the likelihood of business exit in general and status‐quo‐preserving business exit in particular. CEO turnover and pressures exerted by institutional investors predict neither strategic nor status‐quo‐preserving business exit. Low firm performance does not nurture the likelihood of business exit per se but especially promotes status‐quo‐preserving business exit.

Set up for a Fall

This study considers the potentially negative consequences for corporate leaders of being subjected to high levels of ingratiation in the form of flattery and opinion conformity from other managers and board members. Chief executive officers (CEOs) who have acquired positions of relatively high social status in the corporate elite tend to be attractive targets of flattery and opinion conformity from colleagues, which can have potentially negative consequences for CEOs and their firms. Our theory suggests how high levels of flattery and opinion conformity can increase CEOs’ overconfidence in their strategic judgment and leadership capability, which results in biased strategic decision making. Specifically, we contend that heightened overconfidence from receiving high levels of such ingratiatory behavior reduces the likelihood that CEOs will initiate needed strategic change in response to poor firm performance. We tested and confirmed our hypotheses with a dataset that includes original survey data from a large sample of U.S. CEOs, other top managers, and board members in the period 2001–2007. Further analyses suggest that strategic persistence that results from high levels of flattery and opinion conformity directed at the CEO can result in the persistence of low firm performance and may ultimately increase the likelihood of the CEO’s dismissal. Implications for theory and research on social influence, sources of overconfidence in decision making, and the dynamics of executive careers are discussed.

Who Shall Leave? How CEO Preference and Power Affect Executive Turnover in Chinese Listed Companies

Manuscript Type: Empirical Research Question/Issue: This study investigates the effect of CEO preference proxied by CEO-executive demographic dissimilarity on non-CEO executive turnover, and how such effect is moderated by CEO power-related variables (the CEO's founder status and CEO ownership) and firm performance in a sample of Chinese listed companies. Research Findings/Results: The results show that when CEO-executive demographic dissimilarity is inconsistent with social norms (e.g., the non-CEO executive is older and has longer team tenure than the CEO), the non-CEO executive is more likely to exit from the TMT. This association is strengthened by the CEO's founder status and low firm performance, whereas it is weakened by CEO ownership. Theoretical/Academic Implications: The theory of organizational politics proposes that competition among top managers plays an important role in the internal monitoring of firms. In contrast with most literature centering on the role of non-CEO executives in CEO turnover and succession, this study focuses on what kind of non-CEO executives CEOs are likely to dismiss and demonstrates how this process is influenced by CEO power and low firm performance. Practitioner/Policy Implications: Given a CEO's intention to dismiss a non-CEO executive when CEO-executive demographic dissimilarity is inconsistent with social norms, particularly when the CEO is powerful and firm performance is low, the board of directors should keep an eye on any conflict of interests or power struggle between the CEO and the non-CEO executive. The CEO should also be prudent in making executive turnover decisions, because the implications of dismissing such a non-CEO executive for reasons relating to firm performance are largely unknown.

The relationship between innovation orientation and organisational performance

Organisation performance is related to several factors including the organisation’s mission, vision, strategy, and its innovation orientation. An innovation orientation describes an organisation’s degree of innovativeness. This exploratory study examines the relationships between innovation and organisational performance in a sample of Canadian organisations. The results suggest that an innovation orientation is related to overall organisational performance. The high innovating firms had a positive relationship with the top line growth, and customer satisfaction, and bottom line growth, and profitability. There was a positive relationship between return on investment and innovation orientation. Those organisations possessing low innovation orientations had lower firm performance and enterprise value. Significant negative correlations were identified with return on investment, overall firm performance and the overall enterprise value.

Supply chain success: key initiatives differentiating high- and low-performing firms

Supply chain management (SCM) has emerged as a strategic response to the confluence of increasing global competition and pressure on management to be more productive with capital and assets. Many firms, however, are not realising the full potential of their supply chain initiatives. In this study, 588 firms active in supply chain integration (SCI) were divided into three groups based on overall firm performance. Strategic and tactical differences were observed between those in the high- and low-performing groups. Results indicate that high-performing firms have differentiated their supply chain capabilities in three critical areas: truly focusing on the needs of customers, communicating/sharing information with other supply chain members, and improving internal integration and alignment. Primary activities supporting the initiatives include supportive and engaged senior management, creating performance measures to support integration around customers, and building information architectures that facilitate cross-organisational information sharing. This combination of initiatives and activities separates the firms in the sample, providing insight into how other firms can accelerate their supply chain maturation processes.

Companies in rough seas: predictors of early insolvency risk in the Romanian IT industry

The motivation of this paper is to identify the causes of low-performance companies that are operating in the information technology sector, which is seen as a key driver of the Romanian economy. A model is designed to extract the productivity distribution of the sector's companies based on a data set from the Romanian Chamber of Commerce and Industry. Through the statistical analysis of this particular sub-sample of low-performing firms, important characteristics can be derived and tested for significance. In our study, a benchmark value for productivity will also be identified that can offer an early warning indication for potential problem zones when assessing a newly founded company.

Classified Boards, the Cost of Debt, and Firm Performance

This paper documents that classified boards substantially reduce the cost of debt. The evidence is not consistent with the argument that bondholders benefit from board classification because they are concerned about hostile takeovers. Instead, the results suggest that the lessened concern for takeovers associated with a classified board structure reduces managerial risk-taking, and increases managerial incentive for financial disclosure, with both effects inuring to bondholders’ benefit. Consistent with prior literature, classified boards on average are associated with a lower firm performance. However, under the circumstances that the agency conflict between shareholders and bondholders is severe, the performance effect of classified boards appears benign.

Management Capability: Perspectives from New Zealand Small Firms

Management Capability: Perspectives from New Zealand Small Firms

Is Busy Really Busy? Board Governance Revisited

We investigate the relationship between firm governance and the board’s position in the social network of directors. Using a sample of 133 German firms over the four-year period from 2003 to 2006, we find that firms with intensely connected supervisory boards (1) are associated with lower firm performance, and (2) pay their executives significantly more. We interpret these results as evidence of poor monitoring in firms with directors who are more embedded in the social network. In both cases, simple measures for busy directors that were used by other studies in the past fail to show any significant pattern. The findings suggest that the quality and structural position of additional board seats may play a bigger role than simply the number of board appointments.

Business cycle management and firm performance

PurposeBusiness cycles strongly influence corporate sales and profits, yet strategy research largely ignores the possibility that corporate management practices related to the business cycle influence profitability. This paper aims to offer initial empirical support for the view that high peformance firms use a variety of business cycle management (BCM) practices that low performance firms do not.Design/methodology/approachThis exploratory study examines the association of firm performance with business cycle management behaviors identified in the prescriptive literature and further developed from a set of case analyses. The empirical analysis uses a matched sample of 35 pairs of high vs low performers from the S&P 500.FindingsDiscriminant and conditional logit analyses provide preliminary evidence that business cycle‐sensitive behaviors such as countercyclical hiring and investment associate positively with firm performance.Research limitations/implicationsFuture research should use larger data sets and strictly archival data to overcome the limitations of the small sample size and data coding with some subjective elements.Practical implicationsThis research suggests a variety of business cycle related practices dealing with staffing, capital investment, acquisitions and divestitures, capital financing, credit policy, pricing, and advertising may improve firm performance.Originality/valueThis is the first paper to offer evidence of the impact of business cycle related practices across a range of practices and industries.

Change and complementarities in the new competitive landscape: A european panel study, 1992-1996

- This paper addresses three weaknesses in the literature on new organizational forms: the limited mapping of the extent of contemporary organizational change; confusion about how contemporary changes link together; and the lack of systematic testing of the performance consequences of this kind of change. Drawing on a large-scale survey of organizational innovation in European firms, the paper finds widespread but not revolutionary change in terms of organization structure, processes, and boundaries. Using the economics notion of complementarities, the paper develops contingency and configurational approaches to suggest that organizational innovations will tend to cluster in particular ways and that the performance benefits of these innovations depend on their clustering. Complementarities in performance are explored from both inductive and deductive perspectives. Consistent with the expectations of complementarity theory, high-performing firms appeared to be innovating more and differently than low-performing firms. Again consistent with complementarities, piecemeal changes with the exception of IT were found to deliver little performance benefit, while exploitation of the full set of innovations was associated with high performance. Though few European firms were found to exploit the complementarities of new organizational practices, those that did enjoyed high-performance premia.

The decrease in diversification and corporate governance: evidence from Japanese firms

This paper analyzes the effects of firm performance and governance factors on the decrease in diversification of Japanese firms in the 1990s. We focus on the cases of the decrease in diversification, because many previous studies proved that diversification caused firm value discount. Adjusting an excessive unrelated diversification would be an important topic, because the problems of low synergy between business units, inefficiency in management and so on were more serious in this type of diversification. The findings of this study are as follows. In the first half of the 1990s, immediately after the collapse of bubble economy, lower firm performance and main bank relationship encouraged firms to decrease the level of diversification of their businesses. On the other hand, in the latter half of the 1990s when the decrease in diversification itself was activated, higher performing non-manufacturing firms and manufacturing firms with lower profitability but facing higher growth in their main business tried to decrease diversification in order to strengthen the competitiveness in main businesses. Also, this kind of decrease in diversification was supported by the governance characteristics such as insider majority smaller boards of directors and the pressure from capital market.

The presence of a separate COO/president and its impact on strategic change and CEO dismissal

AbstractThis study focuses on the leadership structure at the very top of a firm. Specifically, it examines how the presence of a COO/president, who is separate from the CEO, affects strategic change and CEO dismissal. With longitudinal data on the tenures of 207 CEOs, results suggest that the presence of a separate COO/president increases the magnitude of strategic change under conditions of low firm performance but it decreases the magnitude of strategic change under conditions of high firm performance. In addition, the presence of a separate COO/president increases the likelihood of CEO dismissal under conditions of low firm performance, and this effect is stronger when the magnitude of strategic change is high; but it has no impact on the likelihood of CEO dismissal under conditions of high firm performance. These results suggest that the impact of the presence of a separate COO/president on strategic change and CEO dismissal varies across different organizational contexts. Copyright © 2006 John Wiley & Sons, Ltd.

Analisis Keproaktifan Unit Manufaktur sebagai Pembeda Kinerja Perusahaan

The Passivity of the operations function, when compared to the finance and marketing functions, has long been noted as one of the elements which can explain poor bussiness performance. The subordinate strate¬gic role often assigned to operations leads to a reactive posture. The proactive stance for manufacturing is likely to enhance overall business performance. The riset examined empirically the relationships between manufactur¬ing proactiveness and businees performance based on data collected from a sample of firms in the manufacturing industry. Based on the manufacturing strategy literature, we identify two mayor dimensions of manufacturing proactiveness:(1) the degree of manufacturing`s involvement in the strategic processes of the business unit, and (2) the degree of commitment to long-term program of investments in manufacturing structure and infrastructure aimed at building capabilities in anticipation of their need. The results of the study suggest that dimensions of manu¬facturing proactiveness are show distinguish between high and low performance firms. The firms that score highly on long-term investmens in structural programs coupled high levels of manufacturing invol¬vement in strategic processes and planned investments in infrastructural programs correlate with higher than average performance. Keywords: Manufacturing Involvement, Infrastructural Programs, structural Programs, Business Performance