Publicly-listed Firms Research Articles

Firm Innovation under Import Competition from Low-Wage Countries

In recent years, manufacturing firms in the United States have faced increasing import competition from low-wage countries, especially China. Does this competition hurt or help innovation by firms? This paper studies the effect of the surge in imports from China on innovation in the US manufacturing sector. We combine patent, firm and trade data during 1990-2006 for US publicly-listed firms in the Compustat dataset. We find consistent evidence that Chinese import competition had a positive effect on firm innovation, as measured by citation-weighted patent applications. This positive effect persists when we instrument import competition in the US by using Chinese import penetration in the United Kingdom. Next we investigate this relationship between import competition and innovation by considering industry and firm heterogeneity. We find that firms in low-tech industries and those with a lower degree of product differentiation show a significant positive response to import competition. Firms with a higher capital intensity and lower labor productivity also exhibit a greater response. These results are shown to be robust to a variety of measures for import penetration and innovation.

Politically Connected Firms and Their Stock Return Volatility during High-Visibility Events: Evidence from Malaysia

This study investigates the relationship between political connection and firm stock volatility. We examine whether stock return volatility of politically connected firms differ from non-connected firms during four events. These four events are general election, change of leadership, announcement of government budget, and announcement of policies by the government. This paper uses a volatility event study technique to calculate the abnormal stock return volatility during the four events. We use the data of public-listed firms in Malaysia from 2002 to 2013. The result shows that political connection is associated with higher stock volatility in certain events. They appear to be the most volatile in the event of general election and least volatile during budget announcement. Besides budget announcement, the other three events showed a stronger volatility as they are considered as more of a surprise announcement rather than scheduled announcement. The paper adds to a limited body of literature investigating the relationship between political connection and market behavior in Malaysia and hopes to show that political connection can impact the stock return volatility of firms during high-visibility events in Malaysia.

Entering global markets, R&D update and its role on home donation: a global value chain perspective

ABSTRACT Whether internationalisation promotes or inhibits corporate social responsibility (CSR) such as home donation is a critical question that remains controversial. Drawing on the strategic view of CSR and global value chain (GVC) perspective, we argue that the outward internationalisation of emerging market firms (EMFs) may impede their home donation, partly because as they internationalise, they are mainly embedded in the low-end positions of the GVC, which negatively affect the motivation and capability of their donation to the home market. Such a relationship is even stronger for EMFs with a lower level of R&D intensity, possibly indicating these firms may be more deeply embedded in the low-end position of the GVC. We tested our theory using data collected from public-listed firms in China, and our results can thus help us understand why some EMFs tend to not make home donations from the consideration of GVC embeddedness. Contributions towards GVC embedment and stakeholder considerations are discussed.

Do married couples make better family firm leaders: Evidence from China

Using data from publicly-listed firms, we investigate the relation between marital leadership and Chinese family firm performance. We find that married couples are better leaders for larger firms, firms in knowledge-based industries and firms with complex operations. Additional analysis reveals that marital leadership plays a significant role in contributing to firm performance when the CEO of a married couple firm has high education achievement, when married couples have a small age differential and if one of the spouses is willing to serve as the company’s CEO. Companies benefiting the most from marital leadership are primarily located in the coastal areas of China or in regions where an intense government-market supportive system exists. Also, during uncertain times, the presence of marital leadership tends to enhance a firm’s inclination to invest. Overall, our results suggest that marital leadership is an effective Chinese family firm organizational structure.

Are more sustainable firms able to operate with lower working capital requirements?

This study provides evidence on the relationship between working capital management (WCM) and firms’ sustainability level covering 1,394 US publicly-listed firms in the period 2002-2020. We find that firms with higher ESG scores operate with lower working capital requirements and a shorter cash conversion cycle, although the effect comes entirely from the environmental and social pillars. The inconclusive result for the governance pillar reinforces the role of sustainability on WCM. Outperforming firms in sustainability scores have a lesser need for cash than the industry average. Overall, our findings highlight that WCM optimization may be attained following investment in firms’ sustainability.

Global Corporate Stress Tests—Impact of the COVID-19 Pandemic and Policy Responses

Corporate sector vulnerabilities have been a central policy topic since the outset of the COVID-19 pandemic. In this paper, we analyze some 17,000 publicly listed firms in a sample of 24 countries, and assess their ability to withstand shocks induced by the pandemic to their liquidity, viability and solvency. For this purpose, we develop novel multi-factor sensitivity analysis and dynamic scenario-based stress test techniques to assess the impact of shocks on firm’s ability to service their debt, and on their liquidity and solvency positions. Applying the October 2020 WEO baseline and adverse scenarios, we find that a large share of publicly-listed firms become vulnerable as a result of the pandemic shock and additional borrowing needs to overcome cash shortfalls are large, while firm behavioral responses and policies substantially help overcome the impact of the shock in the near term. Looking forward, while interest coverage ratios tend to improve over time after the initial shock as earnings recover in line with projected macroeconomic conditions, liquidity needs remain substantial in many firms across countries and across industries, while insolvencies rise over time in specific industries. To inform policy debates, we offer an approach to a triage between viable and unviable firms, and find that the needs for liquidity support of viable firms remain important beyond 2020, and that medium-term debt restructuring needs and liquidations of firms may be substantial in the medium-term.

Co-evolution of ownership reform and corporate governance effectiveness in Chinese listed firms

Corporate governance is one of the most widely studied topics in management and business ethics. However, the effectiveness of firms’ corporate governance mechanisms has often been questioned. We adopt an institutional perspective to understand how firms’ corporate governance mechanisms will only be effective when the prevailing institutional context adequately addresses the rights and incentives of controlling shareholders. Taking China’s split-share structure reform in 2005 as a natural experiment, we examine whether shareholder monitoring, board monitoring, executive turnover, and executive compensation can mitigate the risk of organizational distress before and after the reform. Using matched samples of distressed and non-distressed Chinese public-listed firms, we observe that controlling and institutional ownership, executive turnover, and executive compensation reduce the likelihood of organizational distress only after the reform while board monitoring remains ineffective. Our theory and results offer important insights into how the effectiveness of firms’ corporate governance mechanisms co-evolves with prevailing institutional contexts in an emerging economy and how the principal-agent and principal-principal problems are integrally linked.

Are Sustainable Companies More Likely to Default? Evidence from the Dynamics between Credit and ESG Ratings

We investigate the relationship between environmental, social and governance (ESG) performance and the probability of corporate credit default. By using a sample of 902 publicly-listed firms in the US from 2002 to 2017 and by converting Standard & Poor’s credit ratings into default probabilities from rating transition matrices, we find the probability of corporate credit default to be significantly lower for firms with high ESG performance. Furthermore, by expanding the time window in our regression analysis, we observe that the influence of ESG and its constituents strongly varies over time. We argue that these dynamics may be due to financial and regulatory shocks. In a sector decomposition, we additionally find that the energy sector is most influenced by ESG regarding the probability of corporate credit default. We expect an increasing availability of ESG data in the future to reduce possible survivorship bias and to enhance the comparison between ESG-rated and non-ESG-rated firms.

Does size and book-to-market contain intangible information about managerial incentives? Learning from corporate D&O insurance purchase

Using 2008–2018 data for all publicly-listed firms in Taiwan, this paper tests for asymmetric information in the Directors' and Officers' (D&O) liability insurance market. We argue that size and book-to-market ratio contain information such as managerial risk preferences and their intention to reduce litigation risk. Our results show that a negative relationship exists between litigation risk and insurance purchase among small and low book-to-market firms. Our findings pinpoint out the importance of using size and the book-to-market ratio when detecting asymmetric information in the corporate level.

Institutional Investors and 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. Lastly, institutional investors are motivated by financial returns.

The Death of Stock Splits: An Increase in the Costs to Split

In this paper, we document a previously unknown cost of stock splits: failure to sufficiently beat earnings targets and its associated capital markets punishment. We show that both firms’ earnings announcement returns and likelihood of beating analysts’ expectations by at least two cents decline post-stock split. This patterned decline in both split activity and post-split returns only occurs for publicly-listed firms, whereas abnormal returns for closed-end funds do not consistently vary over time. Overall, the results suggest that declining signaling benefits and increasing costs led to fewer stock splits in recent years.

Directors' remuneration, expropriation and firm performance in Malaysia: evidence from non-executive directors' service duration within the remuneration committee

In emerging markets, the issue of directors’ remuneration being used as an expropriation channel by controlling shareholders is a significant problem to be investigated. In this study, using the fixed effect method, we examine the relationship between directors’ remuneration and firm performance, and tests whether independent directors’ tenure within the remuneration committee moderates this relationship in a sample of Malaysian public-listed firms. We find that directors’ remuneration is not significantly associated with firm performance and hence, not used as a channel of expropriation by controlling shareholders. Our results also show that longer tenure of the independent directors within the remuneration committee is negatively related with firm value. However, when directors’ remuneration increase simultaneously with the tenure of the independent directors within the remuneration committee, firm value increased. This increment is stronger in family firms compared to non-family firms. These findings may provide policy implications with respect to how the Securities Commission (SC) could design and implement proper rules and regulations to govern the tenure of the independent directors within the remuneration committee in East Asian emerging market firms where agency problem type II is prevalent and ownership is highly concentrated.

Financial leverage and corporate innovation in Chinese public-listed firms

PurposeThis study attempts to document the impact of financial leverage on corporate innovation in the Chinese nonfinancial public firms listed on Shenzhen and Shanghai stock exchanges.Design/methodology/approachThe firm-level data are collected from CSMAR database for ten years, ranging from 2007 to 2016. The authors have employed the panel fixed effects model and further system GMM approach for analysis. The sample is segregated on the basis of state (SOE) and nonstate ownership (NSOE) to check for the diverse effects. In total, three different proxies of financial leverage are used to unearth the varying impact of short-time and long-term leverage separately. Further, corporate innovation is divided into input innovation (R&D/Sales and R&D/Assets) and output innovation (patents and inventions).FindingsThe results suggest that financial leverage is detrimental to the input innovation while conducive for the output innovation when measured by the number of patents. Contrarily, leverage has a negative influence over the output innovation when measured by the number of inventions. This implies that leverage is more damaging for the highest form of innovativeness (inventions) in China. Input innovation is more sensitive to the changes in long-term leverage versus short-term leverage. Further, the authors find that innovation in SOEs is more sensitive to the changes in the leverage as compared to the NSOEs. The results are free from the threat of endogeneity and identification problems, as reported by the system GMM model.Research limitations/implicationsThe authors did not segregate the sample on the basis of industry/sector.Practical implicationsThe firms pursuing a strategy of radical innovation should try to keep their debt levels lower in order to achieve a higher innovation performance. Although, a rise in the leverage may mean an increased access to finance for a firm but such an access comes at a cost in the form of damage to the corporate innovation. However, increased debt financing may not be so bad for the firms that want to achieve a moderate and not the highest level of innovation. Such firms can produce recurring and synergic effects with debt financing and moderate innovation, once they achieve a level of innovation performance that satisfies their financiers.Originality/valueTo the best of authors’ knowledge, this is probably the first study to check the impact of firm-level financial leverage on both input and output innovation in the Chinese public-listed nonfinancial firms' panel data perspective till now.

Key Audit Matters and the Pricing of Audit Services: Evidence from Hong Kong

Auditors identify, assess, and respond to risks of material misstatement in the financial statements of the clients they audit. This study examines whether textual features of key audit matters (KAMs) disclosed in the audit reports of Hong Kong publicly-listed firms are reflected in the pricing of audit services. We find that audit fees are increasing in the length, complexity, and litigious or weak tone of KAM disclosures and decreasing in the similarity of KAMs to industry peers. Separating the textual content of KAM risk descriptions and auditor responses, we find that audit fees load on the complexity, litigiousness and similarity of risk descriptions and the length and weak tone of auditor responses. In addition, we find that indications of control risk concerns in risk descriptions are incrementally informative for audit fees. Results are robust to controlling for the textual features of the footnote disclosures referenced in KAMs. Finally, we show that our results are insignificant for the Chinese state-owned firms in our sample, indicating that KAM disclosures have limited value in the absence of strong demands for high audit quality.

ON THE VALUE RELEVANCE OF INFORMATION ON ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG): AN EVIDENCE FROM INDONESIA

This paper intends to extend prior developed market-based researches on the value relevance of non-financial information, which is reflected in Environmental, Social and Governance (ESG) disclosure, by examining the association between companies’ financial performances and their non-financial performances. We use 281 firm-year observations of 34 public-listed firms in Indonesia during the period of 2012 - 2018. As the majority of prior studies have focused on the use of price model, we employ regression of both price and return models to assess the value relevance. We also analyze the value relevance of ESG disclosure on both aggregate and singular aspects. We employ sensitivity analysis to assess any differences in the value relevance of both models. The findings show that environmental, social, and ESG disclosure have significant impacts on share prices and stock returns, therefore they have value relevance in both price model and return model. Only governance disclosure has no effect on both share prices and stock returns. Our paper addresses an additional approach in assessing the value relevance of non-financial information. By incorporating two models, we provide a better understanding of the value relevance of ESG information. Our empirical evidence supports the process of developing sustainability reporting regulation in Indonesia regarding the value relevance of non-financial information.

Policy-related risk and corporate financing behavior: Evidence from China’s listed companies

Focusing on quarterly data of China’s publicly-listed firms from 2013Q1-2017Q3, this paper presents an exploratory analysis of the causes of corporate financing behavior through the channels of firm-level characteristics, country-level factors, and policy-related risks. The analysis uses multidimensional measures of policy-related risks, including economic policy uncertainty, geopolitical risk, and political risk. In addition, we assess whether the correlations between policy-related risks and financing activities vary under different financing strategies such as debt financing and equity financing. We also examine how financial constraints and industry differences influence firm financing. The empirical findings indicate policy-related risks can negatively affect corporate financing decisions. The effect of policy-related risk is larger on debt financing than on equity financing. Evidence also reveals that both firm- and country-level factors are essential determinants that guide corporate financing decisions. Finally, the inhibitory influence of policy-related risk is larger for the two separate subsamples of financially constrained firms and manufacturing firms. Knowledge of these impacts can help managers and policymakers to formulate more efficient strategies aimed at improving their economic performance.

How bad is your company? Measuring corporate wrongdoing beyond the magic of ESG metrics

Most attempts to measure corporate wrongdoing rely on data and indices sold by environmental, social, and governance (ESG) data providers. Developed for investors and market players, ESG data have been widely used in academia, but so far, little research has been conducted to assess and overcome the limitations of ESG indices. In this article, we take a first step in this direction and propose using an M-quantile regression approach to develop an index of corporate wrongdoing, understood as firms' involvement in controversies over universal human rights. We apply our proposed methodology to a novel and unique hand-collected dataset of 380 large publicly-listed firms from both advanced and emerging economies, covering the period 2003–2012. We discuss the importance of these indices for managers and practitioners.

Mandatory IFRS Adoption, Corporate Governance and Firm Value

We study whether financial and accounting disclosure affect firm value, by focusing on the adoption of the full International Financial Reporting Standards (IFRS) in Brazil in 2010. We claim that Brazil is a unique and ideal scenario to investigate this issue, because the country adopted IFRS in a shorter period compared to other economies, and its firms presented ex-ante cross-sectional heterogeneity in accounting quality. With a sample of Brazilian publicly-listed firms from 2004 to 2015 we use a diff-in-diff and propensity score matching techniques to compare firms with ex-ante lower quality of accounting (firms in the Regular and Level 1 tiers of corporate governance) with otherwise-similar firms that already complied with higher-quality accounting standards (firms in the Level 2 and Novo Mercado tiers) before the mandatory adoption of IFRS.

Relative earnings and firm performance: Evidence from publicly-listed firms in China, 2005–2012

This paper studies the relationship between three measures of relative earnings and firm performance based on data of 664 listed manufacturing companies in China over the period 2005–2012. It finds that a firm’s financial performance was (1) negatively associated with the capital to labor earnings ratio in the firm; (2) negatively associated with regional average wage relative to the firm’s average wage; and (3) positively associated with the earnings of high-level managers relative to ordinary workers. It also finds that the effects of relative earnings on firm performance differed across regions, industry characteristics and firm ownership structures, and over different time periods.

An Agency Perspective on Firm Diversification, Efficiency and Performance: Evidence From Malaysia

I examine, from the agency perspective, the relationship between three important corporate measures among the Malaysian publicly-listed family-controlled firms: firm diversification, asset utilization efficiency and firm performance. I also explore the role of board independence in moderating the firm diversification-performance relationship. My findings suggest that the greater the extent of firm diversification, the poorer will the asset utilization efficiency be. The poorer efficiency is likely to have caused the equally poorer performance for the firms in my findings. Notably, firm diversification is found to be more detrimental to performance for those firms affiliated to business group compared to firms without group affiliation. The group-affiliated firms which are found to be more diversified than the non-group firms, could have engaged in greater diversification for the self-interest of the controlling family. Specifically, I find that the agency-driven diversification causes the ROA (Tobin’s Q) of the firms to be lowered by 0.354% (0.026) for every additional increase in the number of business segments as the measure of firm diversification. In terms of the moderating effect of board independence, my finding shows that audit committee of board comprises entirely of independent outside directors positively moderate the firm diversification-performance linkage and is capable of reversing the apparently negative linkage between the two.