Publicly-listed Firms Research Articles

North Korea's threats and the cost of equity capital: The effect of information environments

We examine how the information environment affects the association between North Korea's threats and the cost of equity financing. Using a sample of Korean publicly-listed firms from 2012 to 2019, we find evidence that the adverse effect of North Korea's threats on the cost of equity capital is more significant for companies in less transparent information environments after controlling for other factors. Our findings contribute to the literature by identifying that the information environment affects geopolitical risk.

Stock Liquidity Sidedness and Share Repurchase

We show that stock liquidity sidedness plays a vital role in share repurchase decisions. Specifically, we investigate whether share repurchases are affected differently by upside and downside liquidity, which respectively correspond to positive and negative return days. Using a sample of U.S. publicly-listed firms over four decades, we demonstrate that upside liquidity has a larger effect on repurchase initiation, amount, and ratio. Managers of repurchasing firms are more concerned with upside liquidity because they expect their repurchase activities to propel stock prices upward rather than down. The relationship between liquidity sidedness and repurchase decisions is more pronounced for financially constrained firms but less so for firms with higher stock price informativeness. We mitigate potential endogeneity concerns by using the market and industry liquidity sidedness as instruments and exploiting the 2003 Amendment to SEC Rule 10b-18 as an exogenous shock to the information advantages of repurchasing firms. Overall, our findings underscore the importance of market microstructure in shaping corporate policies.

Digital transformation and innovation activities: evidence from publicly-listed firms in China

This study investigates the relationship between digital transformation (DT) and corporate innovation activities. By studying the publicly-listed firms in China, we find that firms with higher levels of DT tend to spend more on research and development (R&D) and tend to generate more innovation outputs. The impact of DT on R&D expenditures is particularly pronounced for firms with more limited disclosure of information, more complex organizational structures, and for those who do not receive government sponsorship. We find no evidence that DT affects innovation through alleviating financial constraints or enhancing operating performance. Collectively, these findings offer novel and practical insights into the interaction between digitization and firms’ innovation.

Environmental regulation and corporate financial risk: The role of credit guarantees

This research explores the relationship between environmental regulation and corporate financial risk in the face of increasing public environmental concerns worldwide. Taking advantage of public-listed firms in Shanghai and Shenzhen stock markets from 2010 to 2022, this study finds strong evidence that environmental regulations inversely affect corporate financial risk after controlling for various firm-specific variables. The findings are robust to a series of robustness tests. In addition, this study further demonstrates that credit guarantees positively moderate the relationship between environmental regulation and firms’ financial risk. Overall, our study contributes to the fast-growing literature on the impact of environmental-related issues on firm outcomes and generates profound policy implications.

Corporate acquisitions and firm-level uncertainty: Domestic versus cross-border deals

This paper investigates how the announcement of acquisitions affect the uncertainty that financial markets perceive about acquiring firms. We use data for publicly-listed firms in the UK between 2004 and 2017 and employ a matching estimator combined with difference-in-differences to address the endogenous selection of firms into acquisitions. While acquisition announcements do not result in a significant change in the volatility of stock returns of acquiring firms across our whole sample, this result hides substantial heterogeneity. Our main finding is that the impact of acquisitions on uncertainty is crucially shaped by a deal's geographic scope—i.e. whether the takeover involves a target in the same country or abroad. Domestic deals reduce the volatility of acquirers' returns by 5% on average one quarter after the announcement, while acquiring a foreign firm increases volatility by a similar magnitude. The heightened volatility resulting from cross-border transactions is primarily driven by acquisitions in industries characterized by high investment irreversibility and foreign markets where barriers to investment are higher. Conversely, the volatility reduction following domestic acquisitions is more pronounced in industries with low irreversibility. Additionally, characteristics of the deal itself, such as the relative size of the acquisition, the payment method, and whether the deal achieves majority control of the target, also play an important role in mediating the effect of acquisitions on volatility.

PERCEPTION OF UNCERTAINTY AND GREEN INNOVATION: MACHINE LEARNING EVIDENCE FROM PUBLICLY LISTED FIRMS IN CHINA

Using a unique panel dataset consisting of 2997 Chinese manufacturing firms publicly listed in the A-share market between 2003 and 2020, we examine whether and to what extent a firm’s perception of uncertainty affects green innovation. After integrating textual analysis with a machine learning approach to measure perception of uncertainty, we find that a firm’s perception of environmental uncertainty negatively affects the number of green patents submitted or approved. The negative effect is weaker for firms followed by more professional analysts, operating in more competitive markets, or located in regions with better institutional settings. In addition, there is significant heterogeneity in the negative effect between non-state-owned versus state-owned firms as well as polluting versus non-polluting firms. The results are robust to different measures of green innovation and perception of uncertainty, and after addressing for potential endogeneity problem. Our study contributes to the literature on behavioral environmental economics by demonstrating that it is not only the environment uncertainty but also how firms perceive the uncertainty matters for green innovation and corporate social responsibility.

Timing is key: When does the market react to unionization efforts?

We estimate short-term capital-market effects of unionization efforts at publicly-listed firms and their subsidiaries in the United States between 2011 and 2019. Our short-horizon event study reports significant negative average cumulative abnormal returns at the public announcement of successful union election certifications. Our results suggest that, on average, the market perceives successful unionization as detrimental to future firm performance, expects unionization efforts, and mainly reacts when all uncertainty is resolved at the publicly-announced certification. Finally, we show that shareholders’ expectations regarding unionization efforts differ for firms with recurrent and rare election cases.

Nexus between Financial Leverage and Board Independence of Public-Listed Firms: Is There Any Stylised Fact?

Introduction/Main Objectives: This paper examines the relationship between financial leverage and board independence for firms listed on the Malaysian stock exchange. Research Methods: This research is conducted using sample of 265 non-financial firms listed on Bursa Malaysia from 2014 to 2018. Finding/Results: Our results show: first, board independence is essential in reducing firm leverage. However, board independence does not affect all firms equally. In particular, board independence has insignificant influences on the financial leverage of young or small firms. In contrast, the financial leverage of old or large firms is negatively associated with board independence. Second, the financial leverage of firms with low profitability is adversely affected by the presence of independent directors. However, the negative impact diminishes as the firms' profitability increases. Conclusion: These results indicate the importance of having independent directors for old, large, or low-profitability firms to reduce their financial leverage. These findings contribute to the stylised facts of the nexus between financial leverage and board independence.

Corporate Philanthropy and CEO Outside Directorships Under Authoritarian Capitalism

Scholars have long suggested that CEOs can benefit from corporate philanthropy. However, little is known about this relationship in contexts of authoritarian capitalism such as China, where the state not only uses its control of economic entities to pursue social goals but also plays a key role in CEOs’ careers. We theorize how corporate philanthropy among state-controlled firms increases the CEO’s likelihood of receiving career benefits from the state in the form of outside directorships. Outside directorships represent an important form of social capital in the Chinese context, and corporate philanthropy is an important mechanism through which social capital can be acquired. In addition, we theorize how two factors—the degree of state ownership and the number of independent directors on the CEO’s board—moderate this relationship. Analyzing a 12-year panel of state-controlled, publicly-listed firms in China comprising 6,594 firm-year observations, we find general support for our ideas. In so doing, we contribute to scholarship on the business–society relationship and corporate governance in the context of authoritarian capitalism.

Do institutional investors facilitate corporate environmental innovation?

This paper addresses whether institutional investors drive firms’ innovation direction toward environmentally friendly technologies. The data pertain to comprehensive environmental patents filed by Chinese publicly-listed firms in the manufacturing and public utility sectors during the 2003–2015 period. We find that institutional investors are associated with higher ratios of environmental patents in total patents for firms in the pollution-intensive sectors than those in the non-pollution-intensive sectors. Institutional investors exert the roles of financial support and corporate governance in pursuit of monitoring firms’ long-term sustainable innovation. They further facilitate the information disclosure on corporate social responsibility.

Firm diversity and data breach risk: A longitudinal study

Research has extensively investigated the rationale of firm diversity from the economic perspective, but little is known about how such a strategy may affect information security. The present study is the first to examine how firm diversity is relevant to firms’ likelihood to experience data breaches (i.e., data breach risk). Drawing from the strands of literature on information security, diversification, and resource-based view, we propose hypotheses on the relationship between firm diversity and data breach risk, as well as the boundary conditions of this relationship. On the basis of a twelve-year sample of publicly-listed firms, our analysis provides evidence to support the negative association between firm diversity and data breach risk. Our analysis also delineates conditions under which the effects of firm diversity can intervene to reduce the data breach risk invoked, such as under related diversity and when managers are managerially capable. For academics, our research accentuates an intriguing but unexamined benefit of firm diversity because it relates to information security. For practicing professionals, this research highlights the significant impact of firms’ operational structure on information security.

Top-down or bottom-up? How environmental state attention and civic participation coordinate with green innovation

ABSTRACT Green innovation is a key driver of sustainable competitive advantage and environmental protection, but requires significant long-term investment. Prior findings suggest that firms are passively pressured to invest in green innovation by their institutional environment. In this study, we combine green innovation with legitimacy theory to examine how environmental legitimacy affects firms’ green innovation. Using a dataset of Chinese publicly-listed firms from 2003 to 2015, we find that firms actively invest in green innovation to acquire both individual legitimacy from citizens and collective legitimacy from the government. We also find that the positive effects on green innovation are heightened when the firm is state owned and weakened when the firm is involved in a pollution-intensive industry.

DO INTERNAL AUDITORS IMPROVE FIRMS’ WORKING CAPITAL MANAGEMENT?

This paper investigates the relationship between internal audit and the working capital management (WCM) of Malaysian public-listed firms. Good WCM is vital as it drives profitability. Anecdotal evidence suggests that the inventory conversion period is the most challenging part of WCM for Malaysian firms. In 2017, around RM71 billion in cash was locked up in working capital and thus suggesting that Malaysian public-listed firms are struggling with WCM. Based on this issue, we are therefore motivated to examine the association between the role of internal audit and WCM in publicly listed firms in Malaysia. Specifically, we would like to examine whether internal audit cost relates to better firms’ WCM. We proxy WCM by the cash conversion cycle (CCC) ratio. With a sample of 309 firm-year observations, we observed a negative and significant relationship between internal audit cost and CCC. The findings suggest that an increase in internal audit cost improves firms’ operational efficiency and effectiveness, hence improving firms' CCC ratios. Furthermore, we find consistent results on the influence of the internal auditor on two of three components of CCC, namely the inventory conversion and the receivables collection periods. Finally, our additional analysis demonstrates that CCC and internal auditing are critical components of firms' performance. By adding the role of internal audit in WCM, this study contributes to a further understanding of the role of internal auditor in agency theory. This study contributes to senior management of publicly listed firms that the cost incurred internal auditing function is an investment that helps improve WCM efficiency. Keywords: Cash conversion cycle; internal audit investment; WCM, public-listed firms; Malaysia

Bringing Honor to Your Ancestors:CEO Early-life Exposure to Clan Culture and CSR

In this study, we examine a CEO’s early-life exposure to an environment characterized with strong clan culture and its implications on corporate social responsibility (CSR). Grounded in the upper echelons theory and imprinting theory, we propose that CEOs’ motivation to bring honor to their clansmen can influence their firms' engagement in CSR activities. We further examine the boundary conditions governing the above relation. Using a longitudinal data of the Chinese publicly-listed firms for 2010-2016, we find that this positive relationship between CEO early-life exposure to clan culture and CSR is weakened when the CEO has oversea experience and when the institutional development in the region where the firm is headquartered is better. Implications to the strategic leadership literature and CSR research are discussed.

Auditor Legal Liability and Stock Price Crash Risk: Evidence from Organizational Transformation of Chinese Audit Firms

Synopsis The research problem This study examines whether and how the increase in auditors’ legal liability affects their clients’ stock price crash risk. Motivation Previous studies have shown that auditors have the incentive to reduce potential litigation risk by improving clients’ financial reporting quality, which in turn limits their clients’ ability to withhold bad news; however, the literature does not provide direct evidence on the relationship between auditor litigation risk and client crash risk. Besides, most studies have focused on auditors’ impact on clients’ financial statements but seldom have investigated auditors’ impact on clients’ other information-disclosure channels. This study attempts to provide evidence showing that auditor legal liability could indirectly affect clients’ crash risk by influencing clients’ conservatism in accounting practices and optimism in information disclosure. The test hypotheses H1: Clients experience declines in future stock price crash risk after their auditors change from the limited liability company (LLC) form to the limited liability partnership (LLP) form. H2: After changing to the LLP form, auditors enhance clients’ accounting conservatism and decrease clients’ optimism in management earnings forecasts and MD&A disclosures, thereby lowering clients’ future stock price crash risk. Target population This study should be of interest to auditors, firm managers, investors, and policy makers. Adopted methodology We adopted Ordinary Least Squares (OLS) regressions and path analysis. Analyses We utilized the staggered organizational transformation of Chinese audit firms — i.e., from LLCs to LLPs — to identify the increase in auditors’ legal liability. Using a sample of Chinese public-listed firms, we performed cross-sectional regressions to examine how clients’ crash risk changes after their auditors transform to LLPs. Next, we conducted a path analysis to show how auditor litigation risk affected client crash risk. Findings We found that after auditors transform into LLPs, their clients demonstrate lower crash risk. We further found that accounting conservatism, optimism in management earnings forecasts, and optimism in management discussion and analysis (MD&A) disclosures explained the negative relationship between auditor legal liability and client crash risk.

THE IMPACTS OF DATA-DRIVEN LEADERSHIP IN IR4.0 ADOPTION ON FIRM PERFORMANCE IN MALAYSIA

The primary purpose of this study is to develop a novel framework to explain the effects of data-driven leadership in IR4.0 adoption on firm performance. We proposed four dimensions for the data-driven leadership: (1) the experience of key personnel with IR4.0 adoption, (2) the appointment of a chief information officer (CIO), (3) the establishment of a technology committee, and (4) the acquisition of technology. This study includes 943 public-listed firms traded on Bursa Malaysia from 2015 to 2019. Using the random effects model (REM), our study shows that data-driven leadership in IR4.0 adoption, particularly the appointment of a CIO and the acquisition of technology, is positively associated with Tobin’s [Formula: see text] and market-to-book value of the firms. Subsample analysis reveals that data-driven leadership has greater significant positive impacts on firm performance in manufacturing-related firms. Further analysis also provides evidence that CEO duality and CEO age negatively affect the role of CIO in manufacturing firms. In contrast, CEO age and founder CEO negatively affect the role of key personnel fitted with IR4.0 experience in nonmanufacturing firms. However, founder CEO in nonmanufacturing-related firms which incorporated IR4.0 technology into the business could significantly improve firm performance. Lastly, there is a noticeable drop in performance when the boards are busy. Our study provides recommendations to both industry and government IR4.0 policy and contributes to leadership literature scholarly, particularly in the data-driven leadership viewpoint in both manufacturing- and nonmanufacturing-related sectors in the era of IR4.0.

Profitability and drug discovery

Abstract Pharmaceutical firms are highly profitable due to high markups enabled by high drug prices. This is justified by the argument that high profits provide incentives for innovation and help fund high research and development (R&D) costs. We investigate the link between past profitability and drug discovery for large publicly-listed pharmaceutical firms between 1980 and 2018. Our sample includes 118 firms with 2534 firm-year observations and in terms of sales corresponds to 55% of the global spending on drugs. By merging three data sets on firm financials, new patent applications, and new drug approvals, we show that pharmaceutical firms’ markups and profitability are consistently higher than average nonfinancial firm profitability, with secularly increasing trends since 1980. Whereas R&D spending has also increased, the number of new drug approvals has not increased at the same pace and the productivity of R&D spending has been declining. In statistical analysis, we fail to identify any strong positive relationship between profitability and new drug discovery. Results are broadly in line with the earlier findings of research on the pharmaceutical industry and provide a contribution to the discussion on the link between profitability and innovation as well as on formulating policies for increasing drug innovation and ensuring the provision of essential drugs while keeping their costs low.

Directors’ compensation, ownership concentration and the value of the firm: evidence from an emerging market

We examine the association between directors’ compensation and firm value and investigate whether ownership concentration moderates this relationship by utilising a sample of Malaysian public-listed firms for the period from 2004 to 2014. Using fixed effect regression, we find that the remuneration of executive and non-executive directors is positively related to firm value. However, there is no conclusive evidence on the moderating effect of ownership concentration on the relationship between executive directors’ and non-executive directors’ compensation and firm value. Our findings indicate that executive and non-executive directors’ compensation packages should be linked to firm performance. The implication of this research addresses one of the key issues in corporate finance i.e., whether it is worth compensating directors in emerging markets or not.

ESG Performance of Privately-Held versus Publicly-Listed Firms: How Do US Private Firms Perform?

ESG has become an important topic among corporate managers and the investment community. This article hypothesizes that private firms tend to have a lower ESG performance than public firms because of capital resource constraints, and US firms tend to have a lower ESG performance than non-US firms because of institutional structures that focus on the shareholder primacy. However, since ESG engagement can create sustained competitive advantages for US private firms that operate under shareholder-centric structures, US private firms may have higher ESG performance than public firms and non-US private firms. Using a sample of 6,073 firms across 34 countries from 2009 to 2017, we found that private firms have lower ESG than public firms. We found that US public firms have lower ESG than non-US public firms, while US private firms have better ESG compared to US public firms and non-US private firms. Hence, the investment community should consider investing in US private firms that have superior ESG performance.

Determinants of Publicly-Listed Firms’ Liquidity: Evidence from French and Taiwanese Banks

This study investigates the effects of 7 internal corporate factors on the liquidity of 30 French and 30 Taiwanese banks and uses the Quick Ratio (LIQ) as a liquidity proxy using quarterly data from 2012 to 2018. The analysis employs multiple linear panel regression models, namely, Ordinary Least Squares (OLS); and both Fixed Effects (FE), and Random Effects (RE) are used as robustness tests. This research examines financial leverage (LEV), size (SZ), return on total assets (ROTA), operating profit (OP), customer loans and bank loans (CLBL), return on equity (ROE), and working capital ratio (WCR) as possible factors influencing a bank’s liquidity. Findings show that banks from both countries do not exhibit many similarities except that SZ positively affects LIQ. For French banks and all banks combined, LEV and ROTA have the same negative relationship with LIQ, whereas WCR has a positive relationship. However, these ratios do not show any significance for Taiwanese banks. Bigger French banks mostly show different results from smaller French banks. LEV and ROE positively affect LIQ, and WCR negatively affects LIQ for bigger French banks, while the opposite is true for smaller French banks. However, both LIQ is negatively influenced by ROTA. Bigger Taiwanese banks show a similar and negative influence of CLBL and WCR on LIQ with smaller Taiwanese banks. This paper provides original empirical evidence in examining financial factors that management can use to better understand changes in a bank’s liquidity. It also contributes to the literature by understanding the different effects of corporate variables on the liquidity of French and Taiwanese banks.