Low Product Market Competition Research Articles

Trade credit and firm value in business groups: evidence from Korea

ABSTRACT This study examines the relation between trade credit and firm value in the context of business groups (i.e. chaebols). We find that the use of accounts receivable negatively influences firm value, and this negative impact is more pronounced for group-affiliated firms than for stand-alone firms. We further find that the negative moderating role of business groups on trade credit-firm value nexus is stronger for firms with lower product market competition, lower large shareholder ownership, higher cash holdings, and higher financial distress. Our main findings are robust to an endogeneity concern, an alternative proxy for trade credit, and different estimation specifications. Our empirical evidence sheds light on how the use of trade credit can potentially be linked to firm value from the perspective of business groups. Our findings can help stakeholders, including investors and creditors, better understand the trade credit-firm value link in the context of business groups.

Testing the impact of sustainable environmental regulations on firm performance with mediating effect of product market competition: empirical evidence from Turkey.

Environmental challenges are increasingly becoming global issues due to the negatively induced effect of carbon dioxide on the natural climate and the well-being of human beings. Industrialisation has intensified the energy demand which brought the surge in the consumption of conventional non-renewable energy resources, including fossil fuels. Despite the overwhelming evidence of negative effects of utilising conventional energy on the atmosphere, there has been a steady rise in industrial production which has encouraged firms to adopt technological innovation. In this sense, many countries have developed various strategies, frameworks and regulations to reduce industrial-driven environmental degradation. Environmental-friendly compliant production technology can be an important substitute model to improve economic development. This study examines the relationship between environmental regulation and firm performance with mediating the impact of product market competition in Turkey. The study uses multi-sectoral firm-level Turkish data covering from 2004 to 2020 which was analysed via numerous methods that control for endogeneity bias. The results of generalised method of moment indicate a strong positive effect of sustainable environmental regulation (SER) on firm performance (FP). Moreover, after mediating the effect of product market competition by decomposing the firms into low product market competition (LPMC) and high product market competition (HPMC), finding reveals a negative effect of SER on FP of LMPC whereas a positive impact was found in the HPMC firms. This finding shows that HPMC compels managers to form a differentiated profit maximisation strategy. In this sense, competition can play a dedicated role in enhancing firm performance in the context of government deliberate strategies and regulations for control of the industrial negative effect on the environment. The industrial sector needs to switch from conventional energy practices to sourcing green and renewable energy that would not jeopardise the environmental quality.

The Impact of Overseas M&A on Performance Sensitivity of CEO Turnover: Evidence From Chinese Listed Companies

In recent years, with China’s growing economic strength driven by the reform of market economic system and the implementation of “going out” strategy, overseas M&A has become an important channel for many Chinese listed companies to optimize the resource allocation and realize the leap of global value chain. Overseas M&A not only garners the advanced technology from overseas companies, but also improves the corporate governance of the parent company. With the data of Chinese listed companies from 2003 to 2019, this paper empirically examines how overseas M&A of listed companies influences the performance sensitivity of CEO turnover, and the PSM method and placebo tests are adopted to discuss the endogeneity. Finally, we proceed the heterogeneity tests by the nature of property rights, CEO power and the market competitiveness of product, respectively. The empirical results show that overseas M&A of Chinese listed companies will significantly improve the performance sensitivity of CEO turnover, and the phenomenon is more significant in SOEs and companies with lower management shareholding ratio, older CEO age, longer tenure of CEO, and lower product market competition. The conclusion of this paper not only offers a unique theoretical perspective for China's listed companies to improve their governance efficiency through overseas M&A, but also provides policy references for improving China's overseas M&A behavior in practice.

Market Liquidity and Price Disparity: Evidence from Chinese Cross-listed Firms

This study investigates the association between stock liquidity and the H-share discount using a sample of Chinese cross-listed stocks in A- and H-shares markets. We examine the liquidity hypothesis by employing depth and trading activity variables. Our results suggest that stocks with a higher level in depth (active trading) of A-shares relative to H-shares are associated with less (more) H-share discount. Such effect is more pronounced in stocks that are non-state-owned and with low product market competition and ownership concentration. Moreover, we provide supportive evidence that the Stock Connect Program introduced in 2015 significantly dampens the association between stock liquidity and H-share discount. Overall, our findings highlight that cross-listed stocks' liquidity differences explain a large proportion of variation in price disparity and identify the stock-specific factors affecting the price disparity.

How Audit Quality Affects the Firm Performance with the Moderating Role of the Product Market Competition: Empirical Evidence from Pakistani Manufacturing Firms

Audit quality (AQ) is a crucial instrument for ensuring transparency and accountability in both the public and private sectors. If the AQ is responsible for the maximization or minimization of profit, then what are the circumstances that make these possible? In this study, we examined the role of the product market competition (PMC) in the relation between the AQ and firm performance (FP). The PMC on the manufacturing firms of Pakistan was divided into two categories—low product market competition (LPMC) and high product market competition (HPMC). This division was calculated using the Herfindahl–Hirschman index (HHI). Then, we used ordinary least squares (OLS), the fixed-effect model, and the generalized method of moment (GMM) to examine the role of PMC on the association between the AQ and FP. The results of the study revealed that the financial performance of firms was enhanced with the quality of the audit. Highly competitive firms demonstrated higher chances to capture the maximum profit and have a positive relationship with FP, while less competitive firms were negatively associated with FP. Furthermore, the HPMC played a vital role in boosting the profit of the firms. On one hand, the connection between the AQ and FP was positively affected by the HPMC. On the other hand, the connection between the AQ and FP was negatively affected by the LPMC. Thus, the findings of this investigation have various implications for owners, investors, shareholders, and governments. This study can help the governments of developing economies to enhance economic conditions by focusing on the industrial sector. This study also contributes to the literature by supporting the agency theory that PMC can mitigate the agency issue between owners and agents.

An analysis of relationship between environmental regulations and firm performance with moderating effects of product market competition: Empirical evidence from Pakistan

Many countries are facing environmental issues that affect the natural climate and life of human beings, therefore, governments have developed the strategies and regulations to control the industrial negative effects on the environment which is called environmental regulations (ER). To extend the porter hypothesis, we examined the moderating effect of product market competition (PMC) to find the circumstances that affect the association between ER and FP. We have divided PMC into high and low product market competition (HPMC and LPMC) by following the Herfindahl-Hirschman Index (HHI). The empirical investigation of this study demonstrates the following outcomes: ER indicates a statistically significant and positive relationship with FP. Furthermore, HPMC has great importance for FP, while LPMC has shown a negative relationship with FP. Besides, we tested the moderating effects of HPMC and LPMC on the association between ER and FP. The moderating effects of HPMC have significant and positive effects on the association between ER and FP. On the other side, the moderating effects of LPMC have significant and negative effects on the association between ER and FP. Moreover, this study promotes the importance of ER and PMC for firms. This study is beneficial for owners, investors, policymakers, and governments to form comprehensive and viable ER for reducing environmental negative effects.

VAT Notches, Voluntary Registration, and Bunching: Theory and U.K. Evidence

Using administrative tax records for U.K. businesses, we document both bunching in annual turnover below the VAT registration threshold and persistent voluntary registration by almost half of the firms below the threshold. We develop a conceptual framework that can simultaneously explain these two apparently conflicting facts. The framework also predicts that higher intermediate input shares, lower product-market competition, and a lower share of business to consumer sales lead to voluntary registration. The predictions are exactly the opposite for bunching. We test the theory using linked VAT and corporation tax records from 2004 to 2014, finding empirical support for these predictions.

VAT Notches, Voluntary Registration, and Bunching

Using administrative tax records for UK businesses, we document both bunching in annual turnover below the VAT registration threshold and persistent voluntary registration by almost half of the firms below the threshold. We develop a conceptual framework that can simultaneously explain these two apparently conflicting facts. The framework also predicts that higher intermediate input shares, lower product-market competition and a lower share of business to consumer (B2C) sales lead to voluntary registration. The predictions are exactly the opposite for bunching. We test the theory using linked VAT and corporation tax records from 2004-2014, finding empirical support for these predictions.

VAT Notches, Voluntary Registration, and Bunching: Theory and UK Evidence

Using administrative tax records for UK businesses, we document both bunching in annual turnover below the VAT registration threshold and persistent voluntary registration by almost half of the firms below the threshold. We develop a conceptual framework that can simultaneously explain these two apparently conflicting facts. The framework also predicts that higher intermediate input shares, lower product-market competition and a lower share of business to consumer (B2C) sales lead to voluntary registration. The predictions are exactly the opposite for bunching. We test the theory using linked VAT and corporation tax records from 2004-2014, finding empirical support for these predictions.

Women on Board: Does the Gender Diversity Reduce Default Risk?

In this study, we aim to provide first comprehensive and robust evidence of the impact of boardroom gender diversity on default risk in Australia and other international markets. Specifically, we answer three key questions: Do women on board reduce default risk? Do women on board reduce default risk through the channel of information asymmetry? Do women on board substitute to either internal or external governance mechanisms? We argue that boardroom gender diversity is likely to have a significant impact on default risk due to the monitoring ability of the women. Specifically, women on board improve the effectiveness of the board in monitoring the opportunistic behaviour of management and mitigating the information asymmetry between management and shareholders and are thus likely to reduce the default risk. Based on the best knowledge of the authors, the research is the first in kind. By using firm data and country data over the period from 2008 to 2013, our preliminary results show that women on board have an overall negative effect on firm’s default risk. These findings are robust to a series of tests, including endogeneity checks, and to alternative proxies for gender diversity and default risk. Moreover, our preliminary empirical evidence supports the role of information asymmetry as a channel of this relationship. Notably, we find that the inverse relationship between gender diversity and default risk is stronger in firms with low ownership concentration, low substantial shareholdings, low product market competition, and high internal governance quality. These findings suggest that gender diversity is a substitute to external governance mechanisms but complementary to internal governance mechanisms. Since the benefit of adding more women on board is under discussion, these findings do not only enrich the regulatory and research debate but also assist investors and firms in designing investment strategies and governance structures respectively. Overall, our preliminary results support the recent calls for more women on corporate boards of Australian firms.

Managerial Ownership and Stock Price Crash Risk: Evidence from China

This study explores the influences of managerial ownership on future stock price crash risk. Managerial ownership induces manager to conceal bad news and choose sub-optimal investment policies, which increases stock price crashes. Using a sample of China’s listed firms for the period 2004-2014, we find managerial ownership is significantly and positively related to the firm’s future stock price crash risk. In addition, we find that the link between managerial ownership and crash risk is more pronounced for firms with higher agency cost, namely those with relatively higher administrative expense ratio, lower asset utilization ratio, and lower product market competition.

Competition, foreign direct investment and welfare

In contrast to the usual belief, we show that a lower product-market competition may make the consumers better off and increase welfare when foreign firms strategically choose between export and foreign direct investment (FDI). A lower product-market competition may increase consumer surplus and welfare by inducing FDI. The higher welfare stems from the increased production efficiency under FDI compared to export by the foreign firm.

CEO Duality and Stock Price Crash Risk: Evidence from China

This study explores the influences of CEOs’ dual roles (a single individual serving as both CEO and board chair) on future stock price crash risk. CEO duality magnifies managerial incentive and ability to overstate performance and hide bad news from investors, which increases stock price crashes. Using a unique sample of Chinese firms for the period 2004-2014, we present evidence that CEO duality is positively associated with firm-specific stock price crash risk. In addition, we find that the impact of CEO duality on increasing crash risk is more pronounced for firms with high information asymmetry, namely those with relatively higher R&D expenditure, higher advertising expenditure, lower product market competition, and lower analyst coverage.

Alliances and corporate governance

We study the link between a firm's quality of governance and its alliance activity. We consider alliances as a commitment technology that helps a company’ Chief Executive Officer overcome agency problems that relate to the inability to ex ante motivate division managers. We show that well-governed firms are more likely to avail themselves of this technology to anticipate ex post commitment problems and resolve them. The role of governance is particularly important when the commitment problems are more acute, such as for significantly risky/long-horizon projects (“longshots”) or firms more prone to inefficient internal redistribution of resources (conglomerates), as well as in the absence of alternative disciplining devices (e.g., low product market competition). Governance also mitigates agency issues between alliance partners; dominant alliance partners agree to a more equal split of power with junior partners that are better governed. An “experiment” that induces cross-sectional variation in the cost of the alliance commitment technology provides evidence of a causal link between governance and alliances.

Alliances and Corporate Governance

We study the link between a firm’s quality of governance and its alliance activity. We consider alliances as a commitment technology that helps a company CEO overcome agency problems that relate to the inability to ex-ante motivate division managers. We show that well-governed firms are more likely to avail themselves of this technology to anticipate ex-post commitment problems and resolve them. The role of governance is particularly important when the commitment problems are more acute, such as for particularly risky/long-horizon projects (“longshots”) or firms more prone to inefficient internal redistribution of resources (conglomerates), as well as in the absence of alternative disciplining devices (e.g., low product market competition). Governance also mitigates agency issues between alliance partners; dominant alliance partners agree to a more equal split of power with junior partners that are better governed. An “experiment” that induces cross-sectional variation in the cost of the alliance commitment technology provides evidence of a causal link between governance and alliances.