Public Firms Research Articles

Internal audit function, audit report lag and audit fee: evidence from the early stage of COVID-19 pandemic

PurposeHow does the internal audit function make external auditors work more efficiently at the early stage of the COVID-19 pandemic? This study examines the relationship between internal audit function, audit report lag and audit fee at the early stage of the COVID-19 pandemic.Design/methodology/approachThis study uses data from all public firms listed on the Indonesia Stock Exchange from 2018 to 2019 using the difference-in-difference test technique to answer the proposed hypothesis. In addition, this study also tested the issue of endogeneity using Coarsened Exact Matching (CEM) and Two-Stage Least Square (Heckman, 1979).FindingsThis study finds that, at the early stage of the COVID-19 pandemic, a good internal audit function significantly reduced audit report lag and audit fee. These findings indicate that good corporate governance implemented through an internal audit function during the COVID-19 pandemic can give assurance to prevent and mitigate the firm's risk so that external auditors can work more efficiently. Furthermore, this study also carries out an additional analysis by subsampling the high and low technological industries. Based on the robustness test, it is revealed that the results of this study are consistent.Originality/valueThis study contributes to the novelty of literature in auditing studies that highlights the audit process at the early stage of the COVID-19 pandemic

Predicting Insider Breaches Using Employee Reviews

ABSTRACT Data breaches committed by current and former employees are of growing concern to organizations. This paper draws on instrumental and expressive motives to predict the likelihood of insider breaches. Our research uses employee reviews on glassdoor.com to infer employees’ instrumental and expressive motives. Specifically, review ratings were used to obtain instrumental motives, while the tone of the reviews revealed expressive motives. Logistic regression on a matched-sample comparison of 71 public firms (41 breached and 30 non-breached) showed that employees’ perceptions of the overall rating of the firm as well as the ratings of compensation and benefits are significantly correlated with insider breaches. Emotional tones of joy, fear, and anxiety were also found to be significant predictors of an insider breach. The study contributes to theory and practice by deepening our understanding of factors affecting insider breaches.

Reputation is golden: Superstar CEOs and trade credit

AbstractThis study investigates how Chief Executive Officer (CEO) reputation, proxied by receiving prestigious awards, impacts suppliers’ provision of trade credit to a firm. Employing a sample of Chinese public firms, we document that firms managed by award‐winning CEOs receive more trade credit than do propensity score matching matched control firms after the award year. Further analyses suggest that the increased trade credit of firms with reputable CEOs is due to the decreased default risk and information risk associated with those firms. Moreover, the impact of CEOs’ reputations on trade credit varies depending on award rarity, financing needs, CEO characteristics and firm opacity. Overall, our results are consistent with efficient contracting theory and signal theory.

Does Public Firms’ Mandatory IFRS Reporting Crowd Out Private Firms’ Capital Investment?

ABSTRACTWe investigate how the mandatory adoption of International Financial Reporting Standards (IFRS) by publicly listed firms in the European Union affects peer private firms. We find that private firms’ capital investment decreases significantly after the IFRS mandate, relative to public firms. Private firms also display decreased investment when benchmarked against firms relatively insulated from the impact of the IFRS mandate, but the magnitude of the effect is smaller in this case. These results are consistent with the hypothesis that mandatory IFRS reporting (combined with other reforms), while increasing public firms’ financing and investment, crowds out funding for private firms. The effect is more pronounced for larger private firms and in industries where public peers have greater external financing needs. Our evidence suggests that financial reporting regulations cause shifts in resource allocation in an economy.

M&A and technological expansion

AbstractWe examine how public firms listed in North American stock exchanges acquire technology companies during 2010–2020. Combining data from Standard and Poor's (S&P), Refinitiv, Compustat, and Center for Research in Security Prices, and utilizing a unique S&P taxonomy that classifies tech mergers and acquisitions (M&As) by tech categories and business verticals, we show that 13.1% of public firms engage in any tech M&A in the S&P data, while only 6.75% of public firms make any (tech or nontech) M&A in Refinitiv. In both data sets, the acquisitions are widespread across sectors of the economy, but tech acquirers in the S&P data are on average younger, more investment efficient, and more likely to engage in international acquisitions than general acquirers in Refinitiv. Within the S&P data, deals in each M&A‐active tech category tend to be led by acquirers from a specific sector; the majority of target companies in tech M&As fall outside the acquirer's core area of business; and firms are, in part, driven to acquire tech companies because they face increased competition in their core areas.

Does Confucianism Influence Business Strategy?

ABSTRACT This study examines the effect of Confucianism, an influential cultural belief and ethical philosophy in East Asia, on business strategy. Employing a large-scale archival dataset of Chinese public firms covering 2007 to 2020, we provide evidence that Confucianism is positively associated with analytical-oriented strategies. Our empirical findings remain intact after accounting for alternative Confucianism measures, controlling formal institutions and religions, instrumental variable methods, and other approaches to addressing endogeneity and robustness issues. Cross-sectional analyses further reveal that the documented effect is more evident for non-state-owned firms, firms with executives lacking overseas experience, and those operating in higher economic policy uncertainty. Overall, our study sheds light on how traditional culture, an important dimension of informal institutions, shapes corporate strategic decisions in emerging markets.

Achieving stability and prosperity: The Chinese way

State governance in corporations controls the economy and employment to develop prosperity in China. Does privatization achieve both objectives? Privatization theory views that giving up state control benefits firms economically but is quite silent on the value of employment benefits. However, market mix theory (Sappington and Stiglitz, J Policy Anal Manag 6(4):567–582, 1987; Stiglitz, Whither Socialism? MIT Press, Cambridge, MA, and London, England, 1994) views that state control of firms to provide employment is valuable. It further implies that corporate performance and employment objectives can co-exist well together. We formalize Market Mix Theory to reveal its testable implications on dual objectives and performance. We test the notion that Chinese corporations pursue two objectives: maximizing economic value and employment, unlike the singular objective of value maximization in Western firms. As well, we test the benefit of partial privatization. First, we test the market mix theory by studying the relationship between state ownership and employment and financial performance as a combined objective. We show that mixed firms have the highest performance in wealth maximization and employment compared to private and state-controlled firms. Second, we examine Chinese SOEs’ Employment with a large sample of 2536 public firms using panel regressions. We find that state ownership and firm employment have a positive relationship. State ownership is positively related to employment stability. Moreover, performance has a negative relationship with state ownership–employment. This result supports our over-employment hypothesis, meaning that economic performance is sacrificed to provide employment. Lastly, we show executive pay for SOE managers is positively related to employment. The employment objective is real in determining state control in Chinese corporations without conflicting to maximize shareholder wealth. Rather, the mixed form of ownership is optimal and vitally contributes overall to the stability and prosperity of China. Our formalization of market mix theory better reflects the reality of motivation, performance and benefits of partial privatization as exemplified in Chinese state-owned enterprises.

Corporate Tax Avoidance and Geographic Distance: Evidence From China

We examine the relationship between geographic distance and corporate tax avoidance in China and find that the closer a firm is to the tax bureau, the less it is likely to avoid tax. This is in sharp contrast to the findings documented by Kubick et al. for U.S. public firms. We argue that this is the result of the local tax bureau collecting more information about the firm instead of the firm collecting more information about tax audits as suggested by Kubick et al. We attribute the different results to the tax system difference between China and the United States, as it is easier for the tax officials in China to collect information about the tax-paying firms. Cross-sectional analyses considering firm age or functional proximity provide further corroborating evidence.

Pengaruh Pengungkapan Tanggung Jawab Sosial Terhadap Penghindaran Pajak dan Peran Asuransi

Corporate Social Responsibility (CSR) has been raised as firms strategic issue in developing countries such as Indonesia. Although the disclosure of social responsibility is still voluntary, many firms are starting to publicize their CSR activities and even provide assurance to get appreciation as socially responsible firms. However, several socially responsible firms have been engaged in tax scandals, raising questions of whether CSR disclosure is used to hide firm fraud or as a reflection of a real socially responsible firm. This study investigates the effect of CSR disclosure and tax avoidance and the role of sustainability reporting assurance to that association. Using Indonesian go public firms published CSR report as a sample, the empirical result shows that CSR disclosure positively effect tax avoidance. Furthermore, results also indicate sustainability reporting assurance moderates the association. The findings indicate that stakeholders should carefully examine firms with active CSR disclosure before labeling it as socially responsible firms.

Social media adoption through product diversification and market diversification: The dynamic capabilities perspective

The literature highlights social media as an effective communication platform for firms to connect with potential customers. Although scholars have investigated various benefits of social media, limited studies have explored the antecedences of social media adoption for firms. Particularly, we lack an understanding of which firm strategies could affect social media adoption and how. Drawing on the dynamic capabilities perspective, this study utilizes logistic regression to analyze data from 1,392 public firms to investigate how particular strategies could influence social media adoption. The results indicate that a firm’s market diversification strategies are a significant determinant of social media adoption, while product diversification strategies play a relatively less important role. A diversification strategy involving social media may be more favorable when entering new markets as opposed to launching new products. The findings of this study contribute to the existing research on social media and shed light on strategic implementations that lead to social media usage by firms.

Mixed Oligopoly and Market Power Mitigation: Evidence from the Colombian Wholesale Electricity Market*

Using information on price bids in wholesale electricity pools and empirical techniques described in the literature on electricity markets, this study identifies the market power mitigation effect of public firms in the Colombian market. The results suggest that while private firms exercise less market power than is predicted by a profit‐maximization model, there are marked differences between private and public firms in their exercise of unilateral market power. These findings support the hypothesis of the market power mitigation effect of public firms.

Disseminating information across connected firms — Analyst site visits can help

When information is disseminated across fundamentally connected firms at a fast pace, limited investor attention should be mitigated. We investigate whether analyst site visits to public firms have any impact on the lead–lag effect, a well-known phenomenon induced by limited investor attention. We find that analyst site visits to a focal firm’s connected firms almost eliminate the lead–lag effect between the visited connected firms and the focal firm at weekly frequency. The Fama–French five-factor alpha drops from 0.365% (t-statistic=3.26) per week for the strategy based on lagged returns of a firm’s non-visited connected firms to -0.082% (t-statistic=-0.97) per week for the strategy based on lagged returns of visited connected firms. We further provide evidence that analyst site visits to connected firms help improve forecast accuracy for the forecasted firm. These results indicate that analyst site visits help disseminate information across connected firms.

Pressures From Media Coverage: Evidence on Managing Earnings Toward Earnings Guidance

This study investigates whether media attention pressures managers to live up to market expectations. Using a comprehensive dataset of media coverage on U.S. public firms, we find that media coverage pressures, rather than deters, managers to manipulate reported earnings to reduce management forecast errors, and the effect is mainly driven by the media’s information dissemination role rather than its information creation role. In addition, we show that the association is stronger when firms face higher litigation risk, when managers have higher reputational concerns, and when corporate governance is weaker. Our findings provide new insights into a potentially negative effect of media coverage in the capital markets.

Gender diversity and firm performances suffering from financial distress: evidence from Indonesia

PurposeThis paper aims to demonstrate gender diversity in the structure of corporate governance and test the effect of diversity on the firm performance suffering from financial distress.Design/methodology/approachThe paper is quantitative using a sample of 467 public firms in Indonesia. Data were analyzed into statistics descriptive and the hypothesis was tested using the test of logistic regression.FindingsThe preliminary results of the paper demonstrate the number of firms employing women and men in the structure of corporate governance of 13% on the commissioner board, 7% on the director board and 5% on the audit committee. Based on the test of effect, this paper further found that firms employing women and men (gender diversity) in the structure of the board of commissioners, tend to suffer from financial distress lower than firms only employing men (non-gender diversity).Research limitations/implicationsThis paper is not an effort to make the proportion of voices of women equal to men, however the representation of women at least exists in the structure of corporate governance as part of workforce diversity and inclusivity. In addition, this paper is considered not to use panel data with the purpose of avoiding repetitive data because of the use of a nominal scale in the logistic regression model.Practical implicationsThe finding of the paper is addressed to deliver insights into the current conversation on the issue of women's day with the theme of Each for Equal and to firms in positioning women in the structure of boardrooms.Originality/valueThis paper extends the limited scholarly work on the nexus between gender diversity and financial performance. The framework of social identity theory and the tenet of corporate governance are elaborated to disclose the finding that firm shareholders tend to benefit from gender diversity in the structure of the commissioner board.

Brokers in beneficial ownership: A network approach

We investigate beneficial ownership networks from 1999 to 2018 and find the presence of the small-world phenomenon, which fosters the participation of shareholders and public firms in beneficial ownership events. The small-world phenomenon is also associated with the presence of brokers, which are nodes that bridge shareholders with other shareholders and targets. Moreover, the beneficial ownership network is shaped by star nodes, that is, nodes that have many adjacent nodes, most of which are not connected to each other. Although star nodes affect the presence of the small-world phenomenon, there is weak evidence in support of the association of star nodes with the participation of shareholders and public firms in beneficial ownership events or with the probability of brokers' presence. Furthermore, we find that cash-on-hand and firm size seem to have the most significant impact on the probability of brokers' presence in the beneficial ownership network.

Financial performance prediction model based on firms’ internal capability determinants: evidence from listed firms in Thailand during the transition period of going public

This study attempts to develop a financial performance prediction model, which explores the relationship between the internal capability determinants and the financial performance of public firms both before and after the firms participated in the Stock Exchange of Thailand (SET). The regression and logistic regression methods are employed in this model based on two internal capability determinants, namely firm financial strengths and firm characteristics. The evaluation is based on 111 listed firms that entered the SET between 2003 and 2014, inclusively. Decision makers can make use of the developed model to predict their firms’ financial performance in relative groups (high, medium and low performance groups) during the transition years when they become public. Unlike prior studies, this study includes the effect of time by considering the relative transition years (compared to the year that the firms join the stock market), which are not the calendar years. As a result, the true timing effect on the firm performance before and after going public can be discovered. The empirical evidence shows that the firms have to maintain different levels of determinants during different years of operation to yield a better financial performance. In addition, they can use the results of the prediction to prepare the most effective investment plan with the strategy of when and how much should be invested for each relative type of firms in order to upgrade its financial performance in relative to other firms in the marke Financial performance prediction model based on firms’ internal capability determinants: evidence from listed firms in Thailand during the transition period of going publicAll authorsNavee Chiadamrong & Tanakrit Wattanawarangkoonhttps://doi.org/10.1080/23311916.2023.2216860Published online:25 May 2023Display full size

Advertising rivalry and discretionary disclosure

Advertising is a critical competitive tool that shapes interactions among firms in the product market. Using third-party tracked data on advertising outlet costs, I find that a nontrivial portion of public firms, even those with intense advertising activities, do not disclose advertising expenses in their financial statements, indicating significant disclosure discretion. I further use product category-level advertising data to develop a firm-specific measure of advertising rivalry. I predict and find that advertising rivalry is negatively associated with the likelihood of disclosing advertising expenses. This negative association is more pronounced when firms advertise on less trackable media outlets or have more mature products. These findings suggest that firms consider their advertising expenses proprietary and that concerns about advertising competition discourage the disclosure of advertising expenses.

Creative corporate culture and corporate tax avoidance

This study examines the association between creative corporate culture and corporate tax avoidance. We construct a novel measure of creative corporate culture through the textual analysis of public firms’ 10-K reports. We find that firms with highly creative culture avoid taxes to a greater extent than firms with less creative culture. This effect is incremental to previously documented effects of research and development and intangible (e.g., patents) on tax avoidance. Overall, our study documents a negative outcome of creative corporate culture on corporate behavior in terms of tax avoidance.

Buddhism and M&A performance: Evidence from China

AbstractThis research explores the effect of Buddhism on mergers & acquisitions (M&As) performance, using 4622 M&A transactions of Chinese public firms from 2004 to 2018. Herein, we offer sufficient evidence that the acquirers located in higher Buddhism intensity regions performed better for both short‐ and long‐term after merger. Furthermore, we show that state ownership also plays an essential role in mitigating its effect, whilst our channel analysis indicates that the source of value creation is driven by higher deal completion rates and fewer violation cases for acquiring firms. Finally, we address the endogeneity issue, and the results remain unaffected.

Social networks and managerial rent‐seeking: Evidence from executive trading profitability

AbstractThis study examines whether board social networks are associated with executive trading profitability. Using a sample of US public firms with a history of executive trading from years 2000 to 2015, we find robust evidence that the profitability of executive trading is significantly lower in firms with higher levels of board social networks. The evidence is consistent with our view that board social networks effectively curb executives' private information advantage over outsiders, thus leading to a lower level of managerial rent‐seeking. Our research has policy implications for regulators concerned about the role of corporate board in capital markets.