Low-quality Firms Research Articles

Macroeconomic perceptions, financial constraints, and anomalies

This paper studies the heterogeneous effects of subjective macroeconomic expectations on the cross-section of equity returns. We argue that an upward revision in expectations of macroeconomic productivity might be accompanied by an excessive increase in investment and external financing, inflated current equity prices, and thus lowered subsequent returns, particularly for financially constrained firms. Thus, following upward revisions in expectations of macroeconomic productivity, subsequent returns are relatively low for small firms, value firms, low-investment firms, risky firms, unprofitable firms, low-quality firms, and financially distressed firms—all of which are more financially constrained. In sharp contrast, following downward revisions in expectations of macroeconomic productivity, these categories of firms earn relatively high subsequent returns. We find that revisions in subjective macroeconomic expectations induce strong predictable time variation in a large set of anomalies. In particular, favorable revisions in expectations of macroeconomic productivity predict significantly stronger profitability, quality, distress, and low-risk anomalies but weaker value, investment, and size anomalies.

Don’t Hurry, Be Happy! The Bright Side of Late Product Release

When a firm releases its product later than its competitor, the firm loses sales because many consumers prefer to buy the competitor’s product rather than wait for the firm’s product release. Therefore, in the absence of any late-mover advantages, conventional wisdom suggests that competing firms will release their products as soon as possible to avoid losing customers if they were to enter later. However, when the market evolves over time and consumers are forward-looking, we demonstrate that this intuition fails and propose a new explanation for why a firm may strategically release its product later than its competitor. Namely, a firm’s late entry can help alleviate price competition due to some consumers’ decisions to wait for the firm’s product release instead of buying a currently available product. We show that in markets where the growth rate is sufficiently high and differentiation between firms is not too low, the firm’s profit gain from alleviated price competition dominates its profit loss from reduced sales, making the firm better off by releasing its product later than the competitor. Surprisingly, when the fraction of consumers who enter the market relatively early increases, the firm may have even greater incentives to release its product late. Finally, we consider markets where firms are differentiated both horizontally and vertically, with one firm having a higher quality (or stronger brand image) than its competitor. We find that high level of vertical differentiation will induce both high- and low-quality firms to rush to the market, releasing their products in the early period. However, when vertical differentiation is moderately high, the high-quality firm may choose to release late, whereas the low-quality firm will prefer to release its product early. History: Anthony Dukes served as the senior editor for this article. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mksc.2023.0393 .

Smaller Slices of a Growing Pie: The Effects of Entry in Platform Markets

Entry of new firms onto a platform has an ambivalent effect on the incumbent firms operating on the platform: the main tension lies between the negative effects of increased competitive pressure and positive indirect network effects. This paper empirically studies the net effect of these countervailing forces and its dependence on firm quality, using a quasi-exogenous shock on a large online platform. On average, market expansion favors incumbents, though the average effect masks substantial heterogeneity: high-quality incumbents experience significant increases in sales and revenue, whereas low-quality firms perform unambiguously worse. Lastly, the paper explores the main mechanisms and firms’ responses. (JEL D22, D85, L14, L15, L84)

The pre-IPO dividend and IPO underpricing: Evidence from China

More than one in five listed firms in China pay cash dividends during the year right before their initial public offerings (IPOs). This paper examines the association between pre-IPO dividend payment and IPO pricing using manually collected Chinese data from 2006 to 2019. We find that firms initiating pre-IPO dividends tend to have lower IPO underpricing than non-initiating firms. We also find that the effect of pre-IPO dividend initiation on IPO underpricing is more pronounced for firms with greater pre-IPO growth and profitability. Additional analyses indicate that initiating firms have better pre- and post-IPO operating performance and post-IPO stock performance. Moreover, initiating firms pay more dividends and attract significantly higher post-IPO investor attention. Collectively, the pre-IPO dividend initiation is not a short-term strategic behaviour of low-quality firms, but aims to send positive signals and improve investors' stock valuation.

Strategic live streaming choices for vertically differentiated products

Live streaming as a new shopping channel can disclose revealing information on quality preference. With this channel, viewers can obtain additional product details along with entertainment utility from streamers' product showcasing. This paper examines live streaming strategies for vertically differentiated firms that sell products of high or low quality. We obtain the optimal pricing strategies for the high-quality, low-quality firms under a particular live streaming strategy (i.e., (N,N); (S,N); (N,S); (S,S)). We identify how the competing firms should set their live streaming strategies. As the entertainment value increases, firms with a competitive edge are more willing to adopt live streaming. If the “quality-adjusted cost” is lower than 12, then the high-quality firm is prone to adopt live streaming; otherwise, the low-quality firm is prone to adopt live streaming. The entertainment value greatly influences the adoption decision. When the streamer is more popular and charges a medium fixed cost, the competitive firm (i.e., small marginal cost, high quality) should adopt live streaming to expand its marketplace. The other firm should refuse live streaming and emphasize improving its product quality and competitiveness. Interestingly, live streaming is not always beneficial to firms when the competitive advantages dominate the impact of live streaming and the informative degree is improved little.

Game Analysis on Supervision of live goods problem with Tiktok Platform Participation including the absence of Lemon market

With the internet and technology development, the utilization rate of short video platforms has gradually increased, and online shopping has become very common. On September 20, 2016, Tiktok short video platform was launched. A TikTok mall is a delivery tool provided by Tiktok e-commerce for merchants. The platform reduces the threshold for merchants to meet the requirements and implements a comprehensive opening policy to obtain more user traffic. Inevitably, lowering the threshold brings the disadvantage of merchants selling fake and inferior products, leading to the lemon for the market and significantly impacting the platform atmosphere and user traffic. Based on the idea of mixed strategy and a journal about the online game theory of product quality, this paper adds more variables, taking into account the negative impact of Tiktok's actual scheme policy and lemon market. Constructing a game theory model including merchants and Tiktok regulatory department, analyze its nash equilibrium and derivative of each variable. Finally, find out that the lemon market exists on the Tiktok platform. Second, the higher cost of high-quality firms leads to strengthening supervision to prevent the low-quality firms from being driven out of the market. Third, the lower profit of low-quality goods, the merchants prefer to sell high-quality goods. The strategies selected by the regulatory authorities on the Tiktok platform and the strategies of the merchants are influenced by the production costs of different quality, the regulatory costs, and the rewards obtained from the efforts made by the regulatory authorities in sampling inspection. These factors will also influence their profits. This paper will prove the conclusion with accurate data.

Game analysis between startup and banks

Objective - Due to information asymmetry, banks cannot know all the information about a company during the financing process. Compared to large firms, start-ups face more difficulties in obtaining debt financing. In order to investigate how the game between start-ups and banks maximizes the benefits of debt financing, this study is based on the game process between start-ups and banks in complete and incomplete information markets. Methodology/Technique – The model assumes deterministic and relatively simple financial decisions, and game theory provides a way to gain insight into the mechanistic phenomenon of debt financing for start-ups by allowing for the inclusion of asymmetric information and strategic interactions in the analysis. Finding – The game process of debt financing for start-ups is studied from a game theoretical perspective to reveal the optimal decisions of both parties in the game process under the influence of information asymmetries, i.e., the basic laws governing the operation of debt financing for start-ups and the important criteria and procedures to ensure that debt financing works correctly. Novelty – The study shows that high-quality start-ups are more likely to receive bank loans than low-quality firms that are willing to pay high-interest rates. Type of Paper: Empirical JEL Classification: C7, C72. Keywords: Asymmetric Information theory; Game Theory; Debt Financing; Startup. Reference to this paper should be referred to as follows: Chengzhuo, Z; Azman, N.H.B.N. (2023). Game analysis between startup and banks, GATR-Global J. Bus. Soc. Sci. Review, 11(1), 01–08. https://doi.org/10.35609/gjbssr.2023.11.1(1)

Deregulation: Why We Should Sometimes Welcome Even Low-Quality Firms

Deregulation: Why We Should Sometimes Welcome Even Low-Quality Firms

Accruals Quality, Shocks to Macro-uncertainty, and Investor Response to Earnings News

Research shows that a firm’s prior accrual quality affects the market reaction to earnings news, as it allows investors to gauge the level of noise in the news. Investor response to earnings news tends to be weaker (stronger) when a firm’s accrual quality is lower (higher). We aim to examine how macroeconomic shocks affect investor reactions. Drawing on ambiguity aversion literature, we argue that if macroeconomic uncertainty spikes before the earnings announcement, investors will favor a ‘better safe than sorry’ attitude; that is, they will tend to react strongly (weakly) to all bad (good) news, taking less into account differences in accrual quality. We consistently find that macro-uncertainty shocks cause (i) a stronger reaction to bad news for low-quality (but not high-quality) firms and (ii) a weaker reaction to good news for high-quality (but not low-quality) firms. The results are robust to alternative model specifications and sensitivity tests. Additionally, we show that if macro-uncertainty resolves in the post-announcement weeks, investors correct their underreaction to high-quality good news, especially if the shock is not extreme.

Talent Discovery and Poaching Under Asymmetric Information

Abstract We develop a model of the market for knowledge workers in which talent is discovered on the job. In the model, asymmetric information and firm-specific human capital combine to generate several predictions relating firm heterogeneity to talent discovery and poaching. We show that high-quality (i.e., large and high-productivity) firms are more likely to become talent poachers, while lower-quality firms are more likely to invest in talent discovery. Job-to-job flows are adversely selected, which implies that internally promoted managers are more productive than those who are externally promoted. The model generates several additional predictions linking firm heterogeneity to the distribution of managerial talent, productivity, compensation and promotions.

Collective Reputation of Tourism Attraction: A Case Study of Lijiang City in China

ABSTRACT Collective reputation plays an extremely important role in many industries including tourism cities. With game theory approaches, based on Lijiang City in China, this article captures the collective reputation of tourism cities to deter low-quality products. On the one hand, low-quality firms have crowding effects on outputs and profits of high-quality firms in tourism cities. These effects are amplified in the long run. On the other hand, entry regulation, monitoring quality and labelling quality are suggested to deter low-quality firms to destroy the reputation of tourism cities. The policy implication is to deter low-quality firms to maintain the collective reputation of tourism cities.

Factors that influence the disclosure of mandatory intangible assets by Polish listed companies

Purpose: The purpose of this paper is to investigate the factors that influence compliance with IAS 38 mandatory disclosure requirements for intangible assets by companies listed on the Warsaw Stock Exchange. Methodology/approach: Based on the content analysis of 117 consolidated financial statements for 2018, disclosure indexes were calculated, which serve as independent variables in multiple regression analysis. Findings: In line with signaling theory, entities signal their superiority (high profita-bility) with costly signals, i.e., disclosing information that cannot be easily obtained from accounting systems (referred to as advanced disclosures). Low-quality firms (with lower profitability) disclose basic information more intensively, which can be easily obtained from accounting systems, and at a low cost. A higher number of significant shareholders (higher information asymmetry) forces better compliance, especially with regard to advanced disclosure. Research limitations/implications: Limited and cross-sectional research sample. Originality/value: The paper demonstrates that mandatory disclosure items differ with respect to the preparation cost. Considering basic and advanced disclosure (with low and high preparation costs, respectively) is potentially beneficial for a deeper un-derstanding of the field.

Competition and Heterogeneous Innovation Qualities: Evidence from a Natural Experiment

Innovations differ substantially in their qualities, from major breakthroughs to small incremental refinements. What is the relationship between product market competition and the quality of innovations? We develop a model where competition encourages high-quality firms to innovate but discourages low-quality firms from innovating and examine the impact of competition on the quality of innovations, taking the implementation of the negative list system for market access in China as a natural experiment. It is found that competition has twofold impacts on the incentives of innovation and that competition improves the overall innovation quality through the improvement of innovation resource allocation. More competition implies a higher elasticity of substitution, leading to stronger incentives for innovation. Meanwhile, competition also decreases industry profits and increases the cost of innovation, which reduces the expected return on innovation, resulting in fewer incentives for innovation. The findings suggest that while R&D subsidies increase aggregate R&D investment, they encourage the survival and expansion of low-quality firms at the expense of high-quality firms and lead to misallocation of R&D resources, resulting in the decline of overall innovation qualities.

It’s good to be bad: The low quality advantage in consumer search markets

The management and marketing literature has found that consumers generally expect high-quality sellers to post high prices. We show that low-quality firms can exploit this in search markets to generate a low price perception. This price perception can lead to low-quality firms dominating search markets while producing a vertically inferior good at equal cost to high-quality firms.

Regulating Product Communication

Information regulation that penalizes deceptive communication by firms can have significant unintended consequences. We consider a market where competing firms communicate private information about product quality through a combination of pricing and direct communication (advertising or labeling) that may be false. A higher fine for lying reduces the reliance on price signaling, thereby lowering market power and consumption distortions; however, it may lead to excessive disclosure. Low fines are always worse than no fines. High fines are welfare improving only if communication itself is inexpensive. Penalizing false claims may reduce profits of both high- and low-quality firms. (JEL D21, D83, L25, M37)

Quality heterogeneity and misallocation: The welfare benefits of raising your standards

Using data from Chile, we find that more restrictive standards are associated with a reallocation of domestic sales from small to large firms, which has allocative efficiency implications. Guided by this evidence, we study the welfare effects of the reallocation brought about by stricter standards in a model with monopolistically competitive, heterogeneous firms, and a general demand system. Restrictive standards have an ambiguous effect on welfare. On the one hand, they improve allocative efficiency because low-quality firms over-produce in the market allocation. This market distortion is driven entirely by the presence of variable markups and exists to varying degrees in both homothetic and non-homothetic frameworks. On the other hand, the imposition of stricter standards forces firms to pay a fixed cost that is welfare reducing. We estimate our model for Chile and find significant heterogeneity in the welfare gains from moving to the optimal standards policy across industries.

Impression Management in Public Sector Audit Proposals: Language and Fees

We adapt impression management theory to investigate: (1) whether governmental audit proposals include the values of ‘professionalism’ (i.e. independence and competence) and ‘commercialism’ (i.e. client cooperation, auditor trustworthiness, client satisfaction, commercial interests), and, (2) the relations of audit proposal language and contextual influences on proposed audit fees and proposal success. The results suggest that proposals accord with audit firms’ market strategies. Compared to other firms, proposals from small, non-specialist firms use more commercial language, while proposals from governmental specialist firms use more competence language. The results also suggest that the market for US public sector audits includes many low cost, low quality firms; specifically, the modal proposal (41.2%) includes high use of commercialism language and low proposed audit fees. We also find that audit firms propose higher audit fees in US states with a weak governmental internal auditing office, and, that greater use of commercial language correlates with higher rates of proposal success, but only in US states with weak governmental internal auditing functions. The finding of inter-relations between proposal language, the strength of governmental internal audit functions, and proposed fees suggests the value of considering multiple influences on the quality of the public sector financial controls. Acronyms : American Institute of Certified Public Accountants (AICPA) ; Certified Public Accountant (CPA) ; Corporate social responsibility (CSR) ; European Court of Auditors (ECA) ; European Union (EU) ; fixed effects (FE) ; General Accountability Office (GAO) ; Governmental Financial Officers Association (GFOA) ; Independent Regulatory Board for Auditors (IRBA) ; Institute of Internal Auditors (IIA) ; International Accounting Education Standards Board (IAESB) ; International Federation of Accountants (IFAC) ; International Organization of Supreme Audit Institutions (INTOSAI) ; National Association of State Auditors ; Comptrollers and Treasurers (NASACT) ; not-for-profit (NFP) entities ; natural language processing (NLP) ; Office of Management and Budget (OMB) ; Request for proposal (RFP) ; Two-stage least squares (2SLS) ; United Kingdom (UK) ; United States (US)

CREDIT QUALITY AND SUBSTITUTION IN SME FINANCE

We investigate whether and how SMEs’ credit quality influences their substitution of bank credit for trade credit. Using data from the five largest European countries, we find that substitution of bank credit for trade credit decreases during the financial crisis, but it decreases significantly less for ex ante low credit quality firms. We control for pre-crisis or lagged firm characteristics including size and external finance dependence, industry effects, sample selection effects and cross-country heterogeneity. We also find that low credit quality firms increase their absolute and relative trade credit usage significantly more than high credit quality firms during the financial crisis. The effects are consistent across countries and stronger for net trade credit borrowers and financially constrained firms. The evidence highlights how credit quality influences demand-side driven substitution in SME finance.

Credit Lines and the Liquidity Insurance Channel

AbstractWe suggest a new mechanism—the liquidity insurance channel—based on the widespread reliance of high credit quality firms on bank credit lines for liquidity management. Our model matches the patterns of usage of loans and credit lines in the cross‐section of firms and defines the conditions under which shocks to bank health affect primarily low or high credit quality firms. Our framework can explain why credit line origination is more cyclical than loan origination. Overall, we uncover a novel interaction between bank health and economic activity through the provision of bank credit lines to high credit quality firms.

Impact of Social Interactions on Duopoly Competition with Quality Considerations

We study the impacts of social interactions on competing firms’ quality differentiation, pricing decisions, and profit performance. Two forms of social interactions are identified and analyzed: (1) market-expansion effect (MEE)—the total market expands as a result of both firms’ sales—and (2) value-enhancement effect (VEE)—a consumer gains additional utility of purchasing from one firm based on this firm’s previous and/or current sales volume. We consider a two-stage duopoly competition framework, in which both firms select quality levels in the first stage simultaneously and engage in a two-period price competition in the second stage. In the main model, we assume that each firm sets a single price and commits to it across two selling periods. We find that both forms of social interactions tend to lower prices and intensify price competition for given quality levels. However, MEE weakens the product-quality differentiation and is benign to both high-quality and low-quality firms. It also benefits consumers and improves social welfare. By contrast, VEE enlarges the quality differentiation and only benefits the high-quality firm, but is particularly malignant to the low-quality firm. It further reduces the consumers’ monetary surplus. Such impact is consistent, regardless of whether the VEE interactions involve previous or current consumers. We further discuss several model extensions, including dynamic pricing, combined social effects, and various cost structures, and verify that the aforementioned impacts of MEE and VEE are qualitatively robust to those extensions. Our results provide important managerial insights for firms in competitive markets and suggest that they need to not only be aware of the consumers’ social interactions, but also, more importantly, distinguish the predominant form of the interactions so as to apply proper marketing strategies. This paper was accepted by Matthew Shum, marketing.