Publicly-listed Firms Research Articles

Board characteristics, ownership concentration and firms’ performance

PurposeThe purpose of this paper is to extend the understanding and application of interactive ties creating value through board characteristics, ownership concentration and firms’ performance by using a contingent theoretical-based framework based on the amalgamation of resource dependence theory, stakeholder theory, agency theory, stewardship theory and institutional theory in a country with weak political environment.Design/methodology/approachThis study includes a sample of an unbalanced panel of 309 non-financial sector firms listed on Pakistan Stock Exchange (PSX) from 2005 to 2016. In order to address the issue of unobserved heterogeneity, simultaneous and dynamic endogeneity, the current study employed the technique Arellano–Bond dynamic panel data estimation under assumptions of GMM (Arellano–Bond, 1991).FindingsThe empirical results suggest that the presence of concentrated ownership moderates and helps to overcome the agency problems through different governance mechanisms (such as board size, independent directors and CEO duality). The larger boards are found to be beneficial whereas the higher representation of independent directors in the board is found to be detrimental for Pakistani firms.Research limitations/implicationsLimitations of the study are, first the current study has analyzed public-listed firms from the non-financial sector, and second the study has only focused on the financial aspect of the performance. The future research could include other proxies of corporate governance and ownership structure such as board diversity and meetings, audit committee and managerial ownership, etc.Practical implicationsThe research also helps Pakistani policy makers in numerous ways. First, the current study confirms the monitoring and expropriation effect of ownership concentration in corporate governance and performance mechanism. Thus, the Security and Exchange Commission of Pakistan (SECP) should make such policies which protect the corporate board against the influence of concentrated ownership so that the interests of the minority shareholders are protected. Second, SECP should ensure that all the listed firms declare a comprehensive profile of their directors (such as academic qualification, age and experience) in their annual reports for the better understanding of the governance−performance mechanism.Originality/valueThe current study augments the emerging body of literature on corporate governance and firm performance mechanism through the amalgamation and testing of existing theories in an emerging economy like Pakistan by using wider and newer data set.

As California Goes, So Goes the Nation? The Impact of Board Gender Quotas on Firm Performance and the Director Labor Market

On September 30, 2018, California became the first U.S. state to introduce a mandatory board gender quota applicable to all firms headquartered in the state. Using a large sample of publicly-listed firms headquartered in the U.S., we find that the introduction of the quota is associated with significantly negative announcement returns to California-headquartered firms. Consistent with the quota imposing frictions, this effect is larger for firms requiring more female directors to comply with the quota. There is also evidence of spillover effects to non-California-headquartered firms. We find evidence in support of two channels through which these spillover effects operate: First, we find spillover effects to be larger for firms operating in industries in which California-headquartered firms lack more female directors to comply with the quota, suggesting that non-California-headquartered firms may lose valuable female directors to California-headquartered firms. Second, we document negative spillover effects for firms headquartered in states dominated by the Democratic Party, consistent with the idea that these firms are more likely to become subject to a board gender quota as well. Finally, we show that, already as of month-end November, female representation on the boards of California-headquartered firms increased. Newly appointed female directors differ significantly in terms of age, independence, and experience from incumbent and leaving female and male directors.

Corporate Governance and Performance: Evidence from Industrial Product and Service Sector in Bursa Malaysia

An empirical study was conducted to investigate the corporate governance variables (board size, board independence, board meeting and duality) that are related to the firm performance (ROA) in industrial product and service sector companies in Bursa Malaysia, with a particular focus on the Main Market. This paper will examined on firm performance based on return on assets (ROA) public-listed firms’ industrial product and service sector. The study adopts by examines the annual reports from the year 2014 to 2018. A multiple regression analysis was conducted on the whole population of listed companies in this sector. The empirical results suggest firm performance had significant relationship with board size, board independence and duality. In contrast, the firm performance is insignificant with board meeting. The outcome of this study could provide insight for the evidence to relevant regulatory bodies in Malaysia to look further on the effectiveness on the code of corporate governance particularly public-listed firms’ from industrial product and service sector in Bursa Malaysia. Furthermore, the research performed for this study specifically focused on identifying governance mechanisms that have a proven impact on enhanced firms’ performance, regardless of whether they are marked as a good practice in regulation or codes. The results provide practical guidance for company directors, as well as a useful guidance for the people empowered with formulating governance regulation and codes.

The relationship between Malaysian public-listed firms’ corporate governance and their capital structure

The purpose of this paper is to investigate the relationship between corporate governance practices and capital structure of public-listed companies in Malaysia. Using the annual reports of 273 Malaysian public-listed firms on the Bursa Malaysia between 2008 and 2012, hierarchical multiple regression analysis was conducted. Corporate governance was measured by variables including board size, CEO duality, ownership structure, and board meeting. Capital structure was measured through four variables: debt-to-equity ratio, long-term debts, short-term debts, and debt ratio. The findings indicated that corporate governance practices have a positive influence on the debt-equity ratio, long-term debt, short-term debt and a debt ratio of capital structure. However, corporate governance practices’ influence on the debt ratio is found statistically insignificant. The findings also indicate that firm size moderates the relationship between corporate governance variables and capital structure. Empirically, these findings are useful for measuring and understanding financing decisions taken by the Malaysian public listed firms. It also offers insights to policymakers interested in enhancing the role of corporate governance in formulating management strategies.

Information Leakage Prior to SEC Form Filings–Evidence from TAQ Millisecond Data

We investigate the stock price movements prior to the publication of publicly-listed firms' SEC form filings. By analyzing the time-stamps of all SEC form filings as well as the stock prices in the 30-minute interval pre- and post-publication, utilizing the TAQ millisecond data, we find strong evidence of information leakage in the 30-minute intervals around Edgar acceptance timestamp of corporate SEC filings, in that if the stocks are ranked into 5 portfolios based on the price run-up prior to filing release, for all form types, the events with the highest run-up would also have the highest price increase post filing release. Regressing pre-publication return on buyer-initiated (classified according to Lee and Ready) minus seller-initiated trade volume fraction yields a positive and highly statistically-significant coefficient. Also, depending on the type of the SEC filing, for filings that could contain both positive and negative information, for example, form 8K 10K and 10Q (as opposed to 13D or 13G which generally can only be good new for stock price), the events with the most run-down prior to the release would also have the most price decrease post filing release. The results are not driven by momentum, and they remain even after the SEC's server fix in March, 2015, as Bolandnazar et al. (2018) have documented information leakage in the several-minutes range due to a technical issue related to SEC's dissemination through FTP and PDS services, which is also a different time-horizon than the 30-minute range we are focusing on. To the best of our knowledge, this is the first paper that documents this phenomenon.

Executive Compensation in Europe: Realized Gains from Stock-Based Pay

This paper adds to the empirical evidence on the extent to which stock-based pay incentivizes and rewards European corporate executives. It shows that the actual realized gains (that is, take-home compensation) from stock-based pay of CEOs in European publicly-listed firms may be underestimated by the use of “estimated fair value” measures. The paper also documents the heterogeneity among countries in terms of the levels and components of CEO take-home pay. We base our work on a sample of 301 large, publicly-traded companies listed in the S&P Europe 350 index from 11 EU countries: Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Spain, Sweden and United Kingdom for the fiscal year 2015. Through analyzing companies’ annual reports, we have hand-collected data on various elements of compensation of the company’s CEO in 2015, including the gains that executives realize from stock-based pay. We document that on average half of the total compensation of the European CEOs in our sample is stock-based, measured by actual realized gains, with large differences among countries. Although in some European countries the majority of total compensation is stock-based, the proportions are still well below those that prevail in the United States. A comparison of the realized-gains measure of CEO compensation with the data based on fair value estimates shows that the latter underestimates the relevance of stock-based pay, in the case of some countries dramatically. Our research findings add to the existing research on CEO pay and the link between pay of EU-based corporate executives and the performance of the companies that they manage. Based on our work, we argue that realized gains measures of CEO pay should be the standard for assessing the incentives and rewards of senior corporate executives in Europe. Our research is the first step in building time series of European executive compensation that will be useful for policies concerning corporate governance and economic performance.

Can informal corporate governance mechanisms mitigate diversification discount? Evidence from Malaysia

PurposeThe purpose of this paper is to examine whether any specific informal corporate governance mechanisms under consideration in this study, namely, political connection, business group affiliation and ownership concentration, are able to mitigate the diversification discount for emerging-market diversified firms using Malaysia as an examination lab.Design/methodology/approachThe study uses a sample data of the entire non-financial public-listed firms in Malaysia over a 12-year period from 2001 to 2012. The generalized method of moments estimators are employed to account for the endogeneity of both corporate governance and diversification.FindingsThis study finds that business group affiliation particularly with large size can help to mitigate the diversification discount whereby political connection and ownership concentration magnify the discount. The finding is robust to alternative diversification measurements, to alternative methods and to endogeneity bias.Research limitations/implicationsThis result implies that diversified firms with affiliation to large business groups are able to reduce the magnitude of the discounted value of diversification.Practical implicationsThis study helps managers, shareholders and investors to evaluate their current/future investments related to firms with diversified business segments. This study also provides implications for policymakers and regulatory bodies to assess the adequacy and competency of the current corporate governance frameworks in place.Originality/valueThis study incorporates the country-specific institutional dimension in designing a research framework that is more relevant in examining the influential effect of governance-related characteristics on the diversification-firm value relationship in an emerging market.

Market and regulative logics: How do emerging firms respond to CSR when they internationalize?

A significant research gap exists in our understanding of how the multinationality influences corporate social responsibility (CSR) in the context of emerging firms. Previous studies mainly focused on the firms from the developed countries and find that multinationality can lead to an increase in the social performance, less attention has been paid to the firms from emerging countries where both regulations and norms of CSR are underdeveloped. We use a longitudinal dataset of Chinese public-listed firms from 2009 to 2014, and argue that CSR behavior of emerging firms is a balance between regulative and market logic. Given the expansion of the international markets can help firms to increase their international flexibility and reduce their resource dependence on government, firms with a high level of multinationality are less likely to engage in CSR activities to conform to the regulative logic developed by the governments, who are the most salient stakeholders in shaping the CSR behavior in emerging countries. Furthermore, Chinese firms with political connection are faced with both the market logic, which views them as the economic engines to seek the natural resources and obtain economic values from international markets in the eyes of the Chinese government, and regulative logic, which notes that they should conform to the environmental and social regulations. We find that the politically connected MNEs will decouple their CSR behavior when facing these two logics simultaneously, by issuing their CSR report to gain the institutional legitimacy, and fewer investments in substantive CSR activities to maximize their profits.

Carbon Pricing Induces Innovation: Evidence from China's Regional Carbon Market Pilots

China has launched seven regional pilots of emission trading scheme (ETS) to limit its carbon emissions. Taking advantage of the variations in the regional ETS pilots across regions and sectors and over time, we employ a difference-in-difference-indifferences (DDD) approach to evaluate the effect of ETS on low-carbon innovation at the firm level. Using patent application data of publicly-listed firms in China between 2003 and 2015, we find that the ETS pilots induced innovation in low-carbon technologies. The more active pilots—measured by carbon price and turnover rate of allowance trading—are associated with more intense low-carbon innovation.

Dividend policy and stock price volatility of industrial products firms in Malaysia

PurposeThe purpose of this paper is to analyse the relationship between stock price volatility (SPV) and dividend policy of industrial products firms listed on Bursa Malaysia.Design/methodology/approachThe sample comprises 166 industrial products public-listed firms covering a time span from year 2003 to 2012. Using Baskin’s framework, firm’s SPV is related to dividend payout, controlling for earnings volatility, firm size, leverage and growth of assets. Further, the impact of the global financial crisis on the relationship between SPV and the tested variables is examined.FindingsEarning volatility significantly explains SPV of industrial product firms during the crisis period, while dividend payout ratio (PR) predominantly influences volatility during pre- and post-crisis sub-periods. The empirical results indicate that dividend policy is a strong predictor of SPV of industrial products firms in Malaysia, particularly during the post-crisis period.Originality/valueThe paper explores the firm’s SPV and dividend policy for a new set of data focussing on industrial products firms listed on the Malaysian Stock Exchange.

Hedge Fund Activism and CEO Compensation

Applying a difference-in-differences approach, we document the effect of hedge fund activism on the corporate governance of target firms through the channel of CEO compensation. We hand-collect data on managerial pay for a sample of 244 U.S. publicly-listed firms that were targets of activist hedge funds from 2009 to 2011, and their corresponding 244 industry, size and book-to-market matches. We find that target CEOs receive higher stock and total compensation, as compared to their peers, prior to an activist's entry. The entry of hedge fund activists results in a decline in target CEO pay to levels prevalent at matched firms. This decrease is not because target CEOs are extracting rents before activism, since CEO pay at target firms prior to activism is sensitive to firm performance. Instead, we show that the entry of hedge fund activists results in a decline in the pay-for-performance sensitivity of CEO stock awards and total pay at target firms. Our findings suggest that incentive compensation and monitoring by activist hedge funds act as substitutes in motivating CEOs to improve firm value.

Acquisition Premium and Target Board Interlocks

This study uncovers the board interlocks as a basis of target bargaining power in takeover negotiations and as an important determinant of acquisition premium. In the imperfect market characterized by information asymmetry, a target firm can leverage its relational resources to overcome information barriers. We posit that a target firm can disseminate information via its board interlocks, attracting well-matched, multiple bidders and thus enhancing its seller’s bargaining strength. However, the premium-generating role of board interlock ties is contingent on the importance of leveraging information through target board. Specifically, high-tech target firms tend to amplify the effectiveness of the target interlocks, whereas high-status acquirers are likely to diminish the effect. Hypotheses are tested with a sample of 1024 acquisitions among publicly-listed firms in the United States from 2000 to 2010. Our framework departs from the dominant emphasis on the acquirer-side sources of acquisition premium and ...

Two Routes to Respond: Firm Strategies in Dealing with Partners' Misbehaviors

How can a firm respond to its partners' misbehaviors to mitigate the potential losses? We identify two types of response strategies: identity- and event-based response strategies. We argue that a firm’s different response strategies reflect the different value propositions of the firm and may take effect in different social contexts. Event history analyses of the responses to partner misbehaviors of Chinese public-listed firms reveal that identity-based responses have a positive effect on investor reactions to the firm. This relationship becomes stronger when the relationship between the firm and the partner is more proximal. By contrast, event-based responses do not have a direct effect on firm performance. However, under a lower level of causal ambiguity positive event-based strategies are more effective than negative ones while under a higher level of causal ambiguity positive event-based strategies hurt firm performance. Our research provides new insights into how firms can respond when they have to face the uncertainties caused by their partners in developing economies.

Product Market Competition and Industry Returns

This paper shows that product market competition has two opposing effects on asset returns. The first relates to the pro-cyclical nature of the value destruction from expansion of competitors, which lowers exposure to systematic risk in more competitive industries. The second is related to the narrower profit margins due to competition, which increase exposure to systematic risk. We find that the first effect dominates the second, so that firms in more competitive industries generally earn lower asset returns. Our results are robust to using five alternative measures of competition and to controlling for the sample selection bias of publicly-listed firms.

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.

Does Firm Innovation Affect Corporate Social Responsibility?

textabstractThis study examines the relationship between firm innovation and CSR. Stakeholders’ concern over transaction-specific investments exacerbates when firms engage heavily in innovation activities. To secure stakeholders’ support, firms adopt CSR effectively as an ex ante signal of sustainability and goodwill. As CSR is endogenous to a firm’s innovation activities, we rely on an instrumental variable (IV) approach to test our hypothesis. Using a sample of 3,315 U.S. publicly-listed firms from 2001 through 2011, we find that more innovative firms also engage more in CSR activities. This effect is stronger for firms of higher risk and/or operating in a less munificent environment. Additionally, firms with higher innovation reap greater financial benefits from their CSR activities.

Behind Chinese Female CEOS’ Underpayment

This paper presents a contingency perspective regarding the compensation to female CEOs in a sample of Chinese public-listed firms. We leverage the role incongruity and the resource-based theories ...

The Price of Being Unique: How Product Specificity Affects Corporate Social Responsibility

This study examines the relationship between a firm’s product specificity and its CSR activities. In the corporate world, firms often adopt CSR as an effective way (an ex ante signal and an ex post disciplinary mechanism) to reduce information asymmetry with stakeholders. We argue that firms making specialized products benefit more from adopting CSR than do firms making common products. As CSR is endogenous to a firm’s product strategy, we adopt an instrumental variable (IV) approach to test our hypothesis. Using a sample of 2,198 U.S. publicly-listed firms from 2001 through 2010, we find that firms making more specialized products record a higher level of CSR. This effect is stronger for firms with higher financial leverage and for firms operating in more uncertain industries. More importantly, we find that firms with a higher degree of product specificity indeed reap greater financial benefits from their CSR activities.

An emerging hybrid mechanism for information disclosure forecasting

Corporate governance mechanisms ensure that investors get a fair return on their investment. A well-established governance mechanism reduces the information asymmetry and agency cost between a firm’s management and stakeholders, but decision makers find it difficult to assess the corporate governance status of publicly-listed firms before the annual official announcement the following year. This study proposes a hybrid ensemble learning forecasting mechanism (HELM), whose single-component candidates from the extreme learning machine (ELM) algorithm with dissimilar ensemble strategies (that is, data diversity, parameter diversity, kernel diversity, and pre-processing diversity) form one initial dataset. We implement locally linear embedding into the proposed mechanism to handle the dimensionality task and then utilize the weighted voting taken from the base components’ cross-validation performance on a training dataset as the integration mechanism. Experimental results show that the proposed HELM significantly outperforms the other classifiers, but its superior performance under many real-life application domains comes with a critical drawback: it is incapable of providing an explanation for the underlying reasoning mechanisms. Thus, this study advances the utilized rough set theory with its explanation capability to extract the inherent knowledge from the ensemble mechanism (HELM). The informative rules can be used as a guideline for decision makers to make a reliable judgment under turbulent financial markets.

The Financing of Ideas and the Great Deviation

I document that publicly-listed firms which are intensive in innovation (intangible capital formation) are less able to engage in volatile external financing flows. The effect is primarily due to debt financing; equity financing acts as a partial substitute. Then, I develop a business cycle model with endogenous innovation that incorporates these facts in order to explain the short and medium-run effects of financial shocks. The increases in the cost of debt and venture capital financing during the Great Recession can explain an important part of the ensuing deviation of output from trend, as the reduction in innovation amplifies persistence.