Public Firms Research Articles

Customer-related executive leadership turnover and firm performance: A dilemma of firm-level human resource contingencies

This research takes an Upper Echelon (UE) disruption-adaptation perspective to understand influence of customer-related executive leadership turnover (CrELT) on firm performance. The authors draw on customer-related executive exits at U.S. public firms between 2004 and 2016. CrELT measures presence (or absence) of annual turnover of one or more executives, accounting for changes (due to exits) to customer-related organization’s formal representation in the top management. We show that CrELT hurts firm performance as it disrupts the functioning of customer-related positions that hurts buyer–seller relationships. We find that CrELT’s association with firm performance is worsened in firm-level environments characterized by voluntary peer exits but is attenuated in firms with greater degree of debt to assets ratio. All else equal, relative to no such turnover, CrELT, in a given firm-year hurts firm performance as the drop in ROA may range from −0.02% to −0.19%. For a firm in S&P Global, with an annual net income of $3.024 billion in 2021, CrELT should result in a loss of over $28 million.

How finance shared services affect profitability: an IT business value perspective.

Shared services have become an important IT-enabled organizational form for providing support business functions to internal users. The information systems that implement and deliver shared services are part of the organizational IT infrastructure that has a twofold effect on firm financial performance. On the one hand, with the shared services model, the IT infrastructure consolidates so that the costs are lowered for providing the common functions firm-wide. On the other hand, the systems delivering the shared services embody the workflow and business functions so that the value of shared services can be gained from improvements in the function performance at the process level. We perceive finance shared services as IT-enabled services for corporate finance and accounting functions, and propose that finance shared services improve firm profitability via cost savings at firm level and via increased working capital efficiency at the process level. We test our hypotheses with data on Chinese public firms from 2008 to 2019. Data analysis results show both direct effect of finance shared services on profitability and mediating effect of working capital efficiency. This study expands our understandings about impacts of shared services, and contributes to empirical research in IT business value.

Leased capital and the investment-[formula omitted] relation

Leased capital accounts for a large fraction of U.S. public firms’ total productive physical capital. In this paper, we extend the neoclassical investment q theory with financial frictions by explicitly considering firms’ option to lease. Our model features firms’ optimal buy-versus-lease decisions with collateral constraints and monitoring costs, and gives a strong implication that measured Tobin’s Q has to be adjusted by leased capital. Empirically, we use our model as guidance to construct the lease-adjusted Tobin’s Q, consistent with the recent leasing accounting change (ASC 842). We show that our lease-adjusted Tobin’s Q is a superior proxy for investment opportunities, especially for firms that rent more capital.

Using Available‐for‐sale Securities to Smooth Earnings: Evidence from China

Utilizing a large sample of non‐financial public firms in China from 2009 to 2016, we find robust evidence that non‐financial firms smooth their earnings through realized gains and losses on available‐for‐sale (AFS) securities. This effect is more pronounced for firms with weaker internal and external corporate governance. Firms with an incentive to manipulate up their earnings are also less likely to smooth earnings through AFS securities. Moreover, firms with more accrual earnings management or real earnings management tend to smooth earnings to a greater extent through AFS securities. Firms smooth earnings only when their net income is positive or when net income is negative and the gains from AFS securities are large enough to offset negative earnings. We do not find supporting evidence for engaging in big bath earnings management through the realization of losses on AFS securities. These findings suggest that gains and losses on AFS securities allow non‐financial firms to actively smooth their earnings. Last, the accounting standards amendments in 2017 that essentially disable earnings smoothing through AFS securities increase price efficiency.

Functional distance and bank loan pricing: Evidence from the opening of high-speed railway in China

Employing the staggered opening of the High-speed railway (HSR) as an exogenous shock, this paper examines the impact of functional distance on bank loan pricing. Based on a unique loan-level dataset from a nationwide state-owned Chinese commercial bank, we find that after the HSR opening, the loan pricing of local private firms decreases significantly. The possible channel is the facilitating of bank's easier access to soft information through the shortening of temporal functional distance. Moreover, the effect of HSR opening is more pronounced when the borrowing firm is difficult to visit or when loan pricing is more sensitive to information. We also find that the HSR opening increases the loan volume for local private firms, while there are no significant changes in loan pricing or loan volume for public firms with HSR opening. Our main conclusion remains valid after considering various robustness and endogeneity issues.

El uso de los presupuestos en la Casa ducal de Osuna (1860-69)

La política española estuvo marcada durante el siglo XIX por una frecuente oscilación en el gobierno entre posturas opuestas liberales y conservadoras. Además, ocurrieron diversos cambios contables, entre ellos, la aparición de los presupuestos en las cuentas del Estado. La literatura ha estudiado la implantación de estos presupuestos en empresas y organizaciones públicas, al menos como límite de gastos permitidos. Este trabajo estudia el uso de presupuestos en una organización privada, la Casa ducal de Osuna, una de las mayores casas aristocráticas españolas, tratando así de paliar la laguna existente en la historiografía contable española acerca de estas organizaciones, a pesar de su importancia en la economía española. En el periodo estudiado, la Casa de Osuna estuvo caracterizada por la reciente eliminación de privilegios de la nobleza, un elevado endeudamiento, un incremento de la dispersión de su patrimonio y la rotación en las personas que se ocuparon de su gestión, circunstancia ésta que resultó decisiva en la implantación y uso de los presupuestos en la Casa. El trabajo se basa en la descripción y el análisis de fuentes primarias conservadas en la Sección Nobleza del Archivo Histórico Nacional y en el Archivo Histórico de Protocolos de Madrid. La discusión permite, por un lado, conocer la situación de la Casa ducal a partir del presupuesto de 1862. Por otro lado, se presenta el debate surgido en la organización acerca del empleo de presupuestos, enfrentándose posturas reacias a su uso, intentos de implantarlos como una herramienta para la gestión de la Casa y presiones para que se usaran como limitaciones del gasto. Siendo esta última, la postura que logró imponerse, el debate sobre el uso de los presupuestos en la Casa se produjo en paralelo a la dialéctica política entre liberales y conservadores que caracterizó a la España del siglo XIX y al auge de la burguesía liberal.

Organizational constraints and outsourcing under demand uncertainty: Evidence from the Brazilian electricity distribution industry

This paper examines how public firms’ organizational constraints affect the sensitivity of labor outsourcing to demand uncertainty. We focus on a single industry in which state-owned firms are subject to additional organizational constraints that private firms are not. We mitigate omitted variable bias by considering the endogenous trade-off between insourcing and outsourcing by measuring average labor prices for each firm. We find that, on average, private firms with strong incentives for profit and flexibility rely more on outsourcing; moreover, their outsourcing is more sensitive to relative prices of insourced and outsourced labor. However, when demand uncertainty arises, state-owned firms increase outsourcing more, making their outsourcing less sensitive to input prices. The results suggest the organizational constraints of state-owned firms, such as multiple objectives other than profit maximization and strong labor protection of insourced labor, exacerbate the downside risk of hiring insourced labor under fluctuating demand, leading state-owned firms to rely more on outsourcing.

Social capital and stock price crash risk: Evidence from US terrorist attacks

AbstractResearch Question/IssueThis study examines whether social capital's monitoring role intensifies during post‐terrorism periods, as terrorism influences citizens' willingness to change society and increases stakeholder participation. Focusing on firms' stock price crash risk, caused by managers' opportunistic behavior (viz., bad news hoarding), we hypothesize that social capital under terrorism reduces stock price crash risk, as it is expected to play an external monitoring governance role.Research Findings/InsightsUsing US public firms, a county‐level social capital index, and terrorist attacks from 1992 to 2014, we find that social capital surrounding corporate headquarters significantly reduces stock price crash risk during post‐terrorism periods. The results are robust to propensity score matching and instrumental variable regressions, and a battery of sensitivity tests. Overall, we suggest that stakeholders' willingness (that is intensified by terrorism) to monitor firms' bad news hoarding is channeled through social capital. Furthermore, the monitoring role of social capital under terrorism is significant for firms with poor internal monitoring, more institutional investors, less entrenched managers, CEOs preferring bad news hoarding, and accompanied by improvement of analysts' forecasts, suggesting that the impact of external governance may differ by firms' governance characteristics.Theoretical/Academic ImplicationsWe contribute to the corporate governance literature by investigating the role of social capital as external governance. While terrorism brings serious damage and economic costs, our study shows that it gives rise to the increased role of social capital, suggesting a novel perspective that terrorism's unexpected socio‐psychological outcome, being non‐financial social threats, leads to positive corporate behaviors by stimulating stakeholders' willingness to monitor firms. Our study is also consistent with the literature that social capital particularly matters in certain periods, such as traumatic events. Furthermore, the impact of a firm's external monitor differs by its governance characteristics, highlighting the importance of corporate governance.Practitioner/Policy ImplicationsWe suggest that social capital serves as firms' external monitor by restraining managers' bad news hoarding under certain circumstances, providing implications for policymakers and practitioners. According to our results, traumatic events, such as terrorism, could be viewed as the moderator for the impact of social capital on corporates, emphasizing the need for intensifying social capital (or making it more effective) without tragic incidents. Meanwhile, one might view social capital as the mediator for the increased willingness of individuals to monitor during the post‐terrorism period, highlighting the need for sufficient social capital in the local community.

Public family firms and economic inequality across societies

Research and public interest on economic inequality have grown over the last years. Family firms and the concentration of wealth and power in the hands of a few wealthy entrepreneurial families have been discussed as both a cause and a consequence of economic inequality. Yet, so far, we lack knowledge about the relationship between economic inequality and the prevalence of family firms in an economy. Our study investigates how the share of family-controlled public firms correlates with various measures of income and wealth inequality. The results show that a higher share of public family-controlled firms leads to more income inequality in a country. This effect is particularly pronounced for the middle of the income distribution as opposed to the top quantiles. Redistribution only mitigates this effect to some extent, as the effect is significant for market income and disposable income. We also find that a higher share of family-controlled firms contributes to an increase in wealth inequality. Our results are of economic relevance as, for instance, a one standard deviation change in the share of family-controlled firms leads to an increase of around 1.3–1.5 percentage points in the Gini coefficients for market income, disposable income, and wealth.

Public firm disclosures and the market for innovation

We examine the spillover effect of public firm disclosures on the patent trading market. The patent market is rife with information frictions, yet can potentially facilitate the reallocation of innovation to the most productive users. We find that going from the 25th percentile to the 75th percentile in public firm presence – our proxy for public firm disclosures – is linked to a 9.4% increase in other related parties' future patent sales. The positive link between public firm presence is stronger where information asymmetry is greatest and where information uncertainty prevails relative to transactions less likely to suffer from information frictions. Tests exploiting cross-sectional variation and public firms' EDGAR implementation corroborate the resolution of information frictions as a mechanism. Additional tests reveal financial statement disclosure as an important information source facilitating patent sales. Our results speak to an important and underexplored externality of public firm disclosures – its contribution to the patent market.

Natural Disasters and Corporate Philanthropy: A Double Movement Perspective

ABSTRACTThis study examines Chinese corporations’ responses to a sudden natural disaster in terms of their philanthropic donations. We apply Polanyi's double movement perspective to argue that rapid market expansion in an emerging economy causes social problems such as large-income disparities and environmental degradation. This calls forth counterforces advocating social responsibility and sustainability. Such countermovements can be strengthened by a major disaster, especially in the domain of corporate philanthropy. The resulting increase in corporate philanthropy persists long after the disaster, especially for those firms with large intra-firm pay disparities, operating in socially contested industries and located in regions with more social foundations. Using the context of China's 2008 Wenchuan earthquake, we find support for these arguments in a sample of Chinese public firms.

The relation between auditing and accounting timeliness in Swedish private firms

PurposeThe purpose of this study is to examine the relationship between auditing/non-auditing and accounting timeliness among Swedish private firms.Design/methodology/approachThis paper uses regression analysis to test the relationship between auditing and two measurements of timeliness; lead time and late filing. The sample consists of Swedish private firms.FindingsThis paper finds that audited firms, when compared with unaudited firms, are significantly less timely. Moreover, greater profitability was associated with more timeliness but only for audited firms. The results of this paper also show that firms being audited by a big 4 auditor are significantly timelier than firms being audited by a non-big 4 auditor.Practical implicationsThe findings in this paper suggests that one aspect of accounting quality, timeliness, does not seem to benefit from auditing in a Swedish context. There is a debate about whether the threshold levels in Sweden should be raised so that more firms voluntarily can opt out of audit. Those opposing a raised threshold level claim that auditing has positive effects on accounting quality and consequently that a raised level would have adverse effects. The findings in this paper do not support such a claim.Originality/valueLittle is known about timeliness in private firms compared to public firms and this paper fills that void. Contrary to prior research, findings show that unaudited firms in a Swedish regulatory setting actually are timelier than their audited counterparts. This questions one of the (presumed) benefits of auditing and should stimulate more research on this issue.

Carbon emission reduction policy with privatization in an oligopoly model.

This study constructs a mixed oligopoly model that includes a public enterprise and two private enterprises. Game theory was adopted to explore the effects of carbon emission reduction policies. In addition, this study analyzes the optimal carbon emission trading prices and privatization decisions. The results show that the proportion of state-owned shares and the equity efficiency gap affect the equilibrium results for different carbon emission policies. Privatization increases the profits of public firms but does not necessarily increase social welfare. Different carbon emission reduction policies have different effects on the equilibrium results. Moreover, the emission reduction target is not completely consistent with the maximum social welfare target and should be comprehensively considered. The government can intervene by setting carbon emission trading prices and making privatization decisions. Full and partial privatization may be optimal decisions.

CAN DIVIDEND PAYMENTS MITIGATE THE INFLUENCE OF COVID-19 CRISIS ON EARNINGS MANAGEMENT?

This paper examines whether dividend payments mitigate the influence of COVID-19 crisis on earnings management practices in Brazil. For this purpose, we use a sample of 264 Brazilian public firms from 2010 to 2021, applying System Generalized Method of Moments (SYS-GMM) regressions. Our main results indicate that, although firms are more prone to engage in earnings management practices during the COVID-19 period, the dividend payout ratio mitigates this influence on earnings management level. Therefore, we show that dividend payment can act as a substitute corporate governance mechanism in times of crisis, since it can reduce the occurrence of earnings management. Additional analyses also support this view, showing that big levels of dividends play a role in minimizing agency conflicts by reducing the level of earnings management. Hence, we contribute to the literature on dividend policy and earnings management, which calls for research to better understand the influence of dividends on earnings management practices in financial crises periods. Further, we shed light on how firms can use dividend policies as a substitute corporate governance mechanism to maintain or establish its reputation during periods of financial crises, benefiting investors, boards, creditors, financial analysts, and policymakers due the increase on the financial reporting quality.

Does Main Street Benefit from What Benefits Wall Street?

AbstractYes. We show that aggregate stock returns predict aggregate U.S. employment, despite the industrial composition of publicly traded firms differing markedly from that of all firms, and the representativeness of public firms declining over time. We also show that appropriately reweighted stock returns predict industry and local labor market outcomes. We find the strongest evidence of an alignment of interests between shareholders and workers in the manufacturing sector, despite its declining labor share of output. Our findings suggest that at quarterly frequencies, product demand shocks are more important drivers of industry- and city-level stock returns than technology shocks.

Exploring how organizational performance feedback influences corporate social responsibility (CSR): the moderating role of LGBT inclusion

PurposeCorporate social responsibility (CSR) captures organizational actions that account for economic, social and environmental performance. CSR is becoming increasingly relevant for organizations because of changing societal norms and attitudes. Prior research on CSR shows that socially responsible actions are beneficial for the firm and the society. However, much less is known about the antecedents of CSR. The authors suggest that CSR is a strategic organizational decision and use organizational performance feedback theory to explain how organizations decide on CSR activities.Design/methodology/approachUsing a longitudinal sample of 189 US public firms with 1,050 observations, the authors test how performance decreases below aspirations and performance increases above aspirations influence CSR. The authors also test for the moderation effect of LGBT inclusion on these relationships as a proxy for CSR consistency and stakeholder support.FindingsThe authors find that as organizational performance decreases further below aspirations, CSR increases and LGBT inclusion strengthens this increase. The authors also find that as performance increases above aspirations, organizations become more engaged in CSR, but LGBT inclusion does not moderate this relationship.Originality/valuePrior research recently started extending the performance feedback theory to CSR, but empirical findings on the relationships between performance feedback and CSR are seemingly inconclusive. Moreover, studies had primarily focused on performance below aspirations and to a much lesser extent on performance above aspirations. This study aims to better integrate organizational performance feedback theory to the CSR discourse.

Cross-ownership on R&D and social welfare in mixed oligopoly

ABSTRACT We analyze the effects of cross-ownership between private firms (i.e. private cross-ownership) on R&D and social welfare in a mixed oligopoly in which a partially privatized public firm competes with two private firms. The main findings are that: (i) private cross-ownership induces the public firms’ R&D, despite it reduces the private firm’s R&D; (ii) private cross-ownership leads to a decrease (an increase) in industry profits if the degree of privatization is low (high); and (iii) private cross-ownership improves (decreases) consumer surplus and social welfare if the degree of privatization is low (high).

The market value of SMEs: a comparative study between private and listed firms in alternative stock markets

This study aims to compare the market value of private firms and publicly listed small and medium-sized firms (SMEs) in alternative stock markets through a private discount approach with estimates of value based on discounted cash flow projections and along with a comparable multiples approach. The valuation methodology applied in this study yielded a final sample that included 232 observations between public and private companies in the Spanish market. To calculate the discount, we apply the different approaches of discounted cash flow and multiples, such as valuation, earnings, book value, and revenue. Our results conclude there is no private discount, instead, the outcomes of this article suggest a premium over public firms for some ratios. The negative private company discounts mean a premium and, on the other hand, some multiples suggest a discount according to the method of valuation. This paper proves private discounts resulted does not have any comparable value within the same country although all firms in Spain use the same currency. We value the discounted cash flows of our forecasts using a discount rate based on the Capital Asset Pricing Model (CAPM), so our study can also be viewed as a test sensitivity of CAPM-based approaches to equity risk premium, terminal value, and growth rate. Furthermore, we compare historical transaction multiples of privately held companies with transaction multiples of similar publicly held firms.

Political–economic instability and earnings management in an emerging market: the case of the 2016 Presidential Impeachment in Brazil

PurposeThis study analyzes earnings management among Brazilian public firms during the 2016 Presidential Impeachment.Design/methodology/approachThe sample comprises, as a treatment group, 721 firm-quarter observations relating to Brazilian listed firms. It also considers a control group of listed firms from Mexico, which were not affected by the exogenous shock analyzed (i.e. the 2016 Presidential Impeachment in Brazil). The firms' quarterly financial data cover the period between 2013 and 2018.FindingsConsidering several proxies related to earnings management by accruals, the main findings suggest a negative relationship between the 2016 impeachment event and the level of discretionary accruals, suggesting that Brazilian firms tended to reduce their earnings management levels during the impeachment process. The results are robust whether the control group is considered or not.Originality/valueThis study brings new empirical evidence to the literature on accounting information quality about the role of the economic and political environment in earnings management, especially in weak institution countries characterized by institutional voids and higher levels of corruption.

Private Peers’ Disclosure Transparency and Public Firms’ Information Environment

Private Peers’ Disclosure Transparency and Public Firms’ Information Environment