Public Firms Research Articles

Cooperation between governments to set up public firms

This paper analyzes cooperation between governments to set up a public firm and decide what percentage of that firm each of them owns. A symmetric model is assumed, with two countries and one domestic private firm in each country. Firms produce a homogeneous good and have quadratic cost functions. The counterintuitive result emerges that there are two equilibria, in each of which one government has a higher percentage of ownership in the public firm than the other. We extend the analysis to consider other factors that may influence the distribution of ownership of the firm between the countries: Heterogeneous goods, constant marginal cost of production, inequality in the number of private firms existing in each country, and different numbers of consumers in each country.

Minority shareholders and tax avoidance

This paper examines whether and how external country-level corporate governance devices affect corporate tax avoidance. Using a panel of public firms across 33 countries, I show that laws empowering minority shareholders hinder corporate tax avoidance, consistent with shareholder protection laws spilling over to tax avoidance through reduced income diversion. I corroborate the validity of these findings using a major corporate governance reform in Italy. In cross-sectional tests, I further document that firms in countries with stricter transfer pricing rules and stronger tax enforcement reduce tax avoidance to a larger extent. Finally, through path analysis, I provide evidence consistent with firms shifting less income to foreign countries in response to stronger minority shareholder rights. Overall, these findings suggest that minority shareholder protection laws can safeguard outside investors and the government against expropriation by insiders.

Information content of credit rating affirmations

AbstractWe examine the economic determinants and informational effects of credit rating affirmations (i.e., the reiteration of past credit ratings) for a sample of US public firms from 1995 to 2020. We find that credit rating affirmations typically follow major corporate events and changes in firm fundamentals that increase information uncertainty about a firm's creditworthiness, suggesting that affirmations reduce uncertainty. We further document that rating affirmations provide value‐relevant information to equity and debt investors. Using a short‐window event study method, we show that equity investors react positively to rating affirmations and that information uncertainty around affirmations diminishes. These findings are more pronounced for firms with non‐investment‐grade ratings. We further show that our results strengthen for firms with greater pre‐affirmation information uncertainty. Finally, consistent with our information uncertainty reduction results from the stock market, we report that bond yield spreads decrease for affirmed firms. Again, the effect is more pronounced for firms with non‐investment‐grade ratings. In summary, we highlight the significant capital markets' effects of credit rating affirmations, an area that the literature has largely ignored.

Regulatory costs of being public: Evidence from bunching estimation

We quantify the costs of major disclosure and governance regulations by exploiting a regulatory quirk: many rules trigger when a firm's public float exceeds a threshold. Consistent with firms avoiding costly regulation, we document significant bunching around three major regulatory thresholds. Estimations reveal that the three examined rules' compliance costs range from 1.2% to 1.8% of market capitalization for firms near thresholds. For a median U.S. public company, total costs amount to 4.3% of market capitalization, and at least 2.3% absent regulatory avoidance frictions. These cost estimates are robust across various extrapolation assumptions, ranging from 2.1% to 6.3% of market capitalization. Regulatory costs have a greater impact on private firms' IPO decisions than on public firms' going private decisions, but such costs only explain a small part of the decline in the number of public firms.

Geographic links and predictable returns

AbstractUsing establishment‐level data of U.S. public firms, we construct a novel measure of geographic linkage between firms. We show that the returns of geography‐linked firms have strong predictive power for focal firm returns and fundamentals. This effect is distinct from other cross‐firm return predictability and is not easily attributable to risk‐based explanations. It is more pronounced for focal firms that receive lower investor attention, are more costly to arbitrage, and during high sentiment periods. The cross‐firm information spillovers and return predictability are also stronger for geographic peers with economic linkages and with positive information. Our results are broadly consistent with sluggish price adjustment to nuanced geographic information.

Aggregate Earnings of Private and Public Firms and the Macroeconomy

Aggregate Earnings of Private and Public Firms and the Macroeconomy

Should the Commonwealth of Virginia Privatize Liquor Sales?

Privatization is an effective policy choice for governments to reduce public debt, improve the financial health of the private sector, and improve the firm’s economic efficiency. However, beyond the economic and financial factors, there are several political implications of privatization policies that are important to consider. Although many economic benefits are presumed to occur due to privatization, the unique position of the Virginia Alcoholic Beverage Control Authority (VA ABC) makes it, unlike most public firms that have been considered for privatization. Privatizing this firm would result in the Commonwealth of Virginia losing over $250 million from its General Fund annually and would negatively impact the state’s labor market. This policy brief examines the economic, financial, and political motivations to privatize state-owned enterprises and discusses the implications that privatizing the VA ABC would have on the Commonwealth.

Staged Financing of Newly Public Firms Around the World

Staged Financing of Newly Public Firms Around the World

Who Invests in What? Public Firms Ownership Around the World

Who Invests in What? Public Firms Ownership Around the World

The Cost of Capital and the Innovative Efficiency of Public Firms

The Cost of Capital and the Innovative Efficiency of Public Firms

At what cost? Environmental regulation and corporate cash holdings

This paper examines the relation between environmental protection laws and corporate cash holdings. Using a panel of public firms across 31 countries, we show that laws protecting the environment reduce cash holdings, consistent with environmental protection regulations weakening firms’ liquidity positions through heightened operating costs and lower profit margins. In cross-sectional analyses, we document that high-market power firms and firms in countries with lenient anti-tax avoidance rules suffer from cash-holding reductions to a lesser extent. Overall, these findings suggest that environmental protection laws map negatively into firms’ cash balances and shed new light on the economic consequences of environmental laws.

The effect of audit committee financial expertise on earnings management tactics in the post-SOX era

To restore investor confidence and promote the integrity of financial accounting information provided to investors, following the passage of the Sarbanes-Oxley Act (SOX), the SEC adopted two new rules for public firms in early 2003, requiring the disclosure of audit committee financial expertise (ACFE) per SOX 407 and the reconciliation of non-GAAP financial measures to those most comparable in GAAP (Regulation G) per SOX 401(b). Using quarterly filing data in the post-SOX era from March 2003 to December 2016, this study examines the impact of these requirements, with a focus on the effect of ACFE on the main earnings manipulation tactics used to just meet or beat analyst expectations (JUSTMBE). Our study investigates the effects of overall ACFE and its components on three key earnings management tactics, namely, discretionary accruals, real activities management, and non-GAAP financial disclosures. We observe that firms with a higher level of ACFE, particularly accounting and finance expertise, exhibit a lower propensity to JUSTMBE. Furthermore, we posit that two upward earnings manipulations, accrual-based and real activities management, are significantly mitigated by ACFE through a complementary effect of its accounting and supervisory expertise components. However, we identify a clear strategic shift in which non-GAAP financial disclosures with unexpected exclusions become a popular alternative tactic for managers to JUSTMBE under the increasing presence of ACFE. This study provides empirical evidence with implications for regulators to consider more rigorous intervention and regulation on non-GAAP disclosures and to refine the requirement of audit committee financial experts with an emphasis on the complement of accounting and non-accounting financial expertise to effectively curtail earnings manipulation.

CEO narcissism and asymmetric cost behavior

This research investigates the relationship between chief executive officer (CEO) narcissism and asymmetric cost behavior. Based on the expectation that CEOs’ narcissism leads to myopic management, I replicate the existence of cost stickiness in a large sample of U.S. public firms and find that narcissistic CEOs exhibit a lower degree of cost stickiness. Additionally, I find that the negative effect of CEO narcissism on cost stickiness is boosted under poor past performance and when firm uncertainty is high. Several robustness tests, including alternative measurements of costs and narcissism, confirm the validity of the results. The findings of this study contribute to the current discussion about the role of narcissistic personalities of CEOs and the behavioral aspects of corporate decisions.

Labor cost stickiness and managerial decisions on human capital adjustment

PurposeOn the basis of labor economics theories, this study examines how adjustment in human capital accounts for labor cost stickiness.Design/methodology/approachThis study makes use of employee education level as a measure of the quality of human capital and relies on data from Chinese public firms to conduct the empirical test. This study focuses on two important components of labor cost changes: one corresponding to the adjustment in the number of employees (capacity adjustment) and another corresponding to the adjustment in the mix of employee education levels (quality adjustment).FindingsThis study reveals that labor cost changes driven by the adjustment of employee education level are sticky. This stickiness cannot be explained by the standard adjustment cost theory. This further shows that firms that actively adjust their employee quality during downturns experience improved future performance. The findings are robust to alternative measures and specifications.Originality/valueThis study provides new evidence for and insights into the cost behavior literature. Previous studies treat input resources in a homogenous way and focus on the effect of capacity adjustment. This study considers the heterogeneity of resources and examines three dimensions of salary cost adjustment: capacity, structure, and unit cost. In line with the economic theory of sticky costs proposed by Banker et al. (2013a), the study’s evidence sheds light on the additional underlying economic mechanisms driving cost stickiness behavior. Specifically, managers asymmetrically adjust both employee structure and average salaries, in addition to employee number. This study also adds to the existing knowledge of the consequences of managers' actions regarding cost behavior.

Cross-border M&A, gender-equal culture, and board gender diversity

This paper investigates how acquirers' board gender structures respond to the target country's gender-equal culture following cross-border M&A deals. Using a sample of Chinese public firms that conducted cross-border M&As from 2008 to 2019, we find that acquirers tend to adjust the proportion of female directors to better align with the target country's gender-equal culture. We address the potential selection concerns by adopting the Heckman two-step method and show the results are robust. Further analyses show that acquirers are more likely to adjust their board gender structures when the deal size and the target size are larger, and when the communication and legitimacy barriers are greater, suggesting the adjustment is a strategic move. Moreover, we find evidence of synergy gains following board adjustments in terms of enhanced firm performance and increased innovations.

Geographic distance in cross-border acquisitions: The impact of CEO's psychological attributes

This study examines the influence of acquiring firm CEOs' psychological attributes on the geographic distance of target firms in cross-border acquisitions. Drawing on the regulatory focus theory, we argue that CEOs with a higher dispositional prevention focus are more vigilant and loss-aversive, avoiding target firms at a greater geographic distance in cross-border acquisitions. Furthermore, building on the concept of regulatory misfit, we examine the moderating effect of acquiring firm CEOs' context-specific experience and the munificence of acquiring firms' industries in priming the dispositional prevention focus. In a sample of 218 cross-border acquisitions by public firms from the United Kingdom from 2006 to 2014, we find support for our hypotheses. This study emphasizes the role of micro-foundations in cross-border acquisitions and deepens the understanding of cross-border acquisition location choice decisions.

Net operating losses and Chapter 11

In this paper, we investigate the association between net operating losses (NOLs) and Chapter 11 filings by firms that decided to restructure their business (“restructuring firms”). Studying a sample of public firms in the US over a 30-year period, we show that after controlling for the expected industry post-reorganization tax rates, higher NOLs are associated with the decision to file under Chapter 11. Further investigation shows that fresh-start firms benefit from lower tax rates after emerging from the Chapter 11 procedure. We contribute to the tax literature on NOLs and important firm decisions and on taxation in fresh-start firms, as well as to the literature on Chapter 11. We inform policymakers and practitioners regarding the use of tax benefits in restructuring frameworks.

The Impact Of Accounting Standards for Foreign Currency Transactions and Financial Statements Translation on Auditing Procedures: The Case of Iraq

This paper aims to convey the notion of auditing, its relevance, and the report's function in strengthening the recipients' trust. It also tries to study accounting rules for foreign currency transactions and interpret and unify financial statements for overseas entities. The research aims to study and analyze accounting for foreign transactions and the translation of financial statements in public sector corporations, the research sample, and compare these accounting treatments with those that should be included in the relevant accounting standards. The objective meaning of the word auditing is based on the fact that auditing is a search for the truth since this is the core of the auditing process. Auditing is fundamental to all operations, and its presence dates back to antiquity and the first civilizations. This study aims to shed light on the concept of foreign transactions, the translation of financial statements, the presentation and discussion of problems arising from them, the accounting standards for accounting for transactions in foreign currency, the translation and consolidation of financial statements for foreign units, their impact on auditing operations and what is reflected in the auditors' report. In addition to investigating the reality of accounting for transactions in foreign currency and translating the financial statements of public firms, the sample research also examines the validity of accounting for transactions in foreign currency. The findings indicate that the financial statements of the public sector enterprises comprising the study sample do not fairly represent their work and financial status outcomes.

Shareholder Activism in Small-Cap Newly Public Firms

We examine a private dataset of engagements by a UK fund in small-cap newly public firms. The fund inherits unwanted holdings from disparate investors and earns fees liquidating its portfolio. It considers activism only when blocks cannot be exited efficiently. Engagements are with firms that have founder chairpersons or CEOs, other blockholders thought to be supportive, and few outside directors. Engagements are conducted behind-the-scenes, without involving other shareholders, are strikingly successful, and result in cumulative abnormal returns of 8% to 10% when objectives are met. The fund outperforms benchmarks, and we estimate that abnormal returns derive mostly from engagements rather than stock picking.

Banking on Carbon: Corporate Lending and Cap-and-Trade Policy

Abstract We estimate the effect of carbon pricing policy on bank credit to greenhouse-gas-emitting firms. Our analyses exploit the geographic restrictions inherent in California’s cap-and-trade bill and a discontinuity in the embedded free permit threshold of the federal Waxman-Markey cap-and-trade bill. Affected high emission firms face shorter loan maturities, lower access to permanent forms of bank financing, higher interest rates, and higher participation of shadow banks in their lending syndicates. These effects are concentrated among private firms, while credit terms of public firms are largely unaffected. Overall, we show that banks respond quickly to realizations of transition risk.