Rank Firms Research Articles

Web Footprints of Firms: Using Online Isomorphism for Competitor Identification

Competitive isomorphism refers to the phenomenon of competing firms becoming similar as they mimic each other under common market forces. With the growing presence of firms as well as their consumers and suppliers on the Web, we discover a parallel phenomenon of online isomorphism wherein the Web footprints of competing firms are found to overlap. We propose new online metrics based on the content, in-links, and out-links of firms' websites to measure the presence of online isomorphism as well as uncover its utility in predicting competitor relationships. Through rigorous analysis involving more than 2,600 firms, we find that predictive models for competitor identification based on online metrics are largely superior to those using offline data such as Standard Industrial Classification codes and market values of firms. In addition, combining online and offline metrics can boost the predictive performance. We also find that such models are valuable for identifying nuances of competitor relationships such as asymmetry and the role of industrial divisions. Furthermore, the suggested predictive models can effectively rank firms in an industrial division by their likelihood of being competitors to a focal firm as well as identify new future competitors, thus adding to a portfolio of evidence indicating their utility for managers and analysts.

Web Footprints of Firms: Using Online Isomorphism for Competitor Identification

Competitive isomorphism refers to the phenomenon of competing firms becoming similar as they mimic each other under common market forces. With the growing presence of firms as well as their consumers and suppliers on the Web, we discover a parallel phenomenon of online isomorphism wherein the web footprints of competing firms are found to overlap. We propose new online metrics based on the content, in-links, and out-links of firms’ web sites to measure the presence of online isomorphism as well as uncover its utility in predicting competitor relationships. Through rigorous analysis involving more than 2600 firms we find that predictive models for competitor identification based on online metrics are largely superior to those using offline data such as SIC codes and market values of firms. In addition, combining online and offline metrics can boost the predictive performance. We also find that such models are valuable for identifying nuances of competitor relationships such as asymmetry and the role of industrial divisions. Furthermore, the suggested predictive models can effectively rank firms in an industrial division by their likelihood of being competitors to a focal firm as well as identify new future competitors thus adding to a portfolio of evidence indicating their utility for managers and analysts.

An evolutionary approach to preference disaggregation in a MURAME-based creditworthiness problem

In this paper, we propose to use an evolutionary methodology in order to determine the values of the parameters for implementing the MUlticriteria RAnking MEthod (MURAME). The proposed approach has been designed for dealing with a creditworthiness evaluation problem faced by an important north-eastern Italian bank needing to score and/or to rank firms (which act as alternatives) applying for a loan. The point of the matter, known as preference disaggregation, consists in finding the MURAME parameters which minimize the inconsistency between the MURAME evaluations of given alternatives and those properly revealed by the decision maker (DM). To find a numerical solution of the involved mathematical programming problem, we adopt an evolutionary algorithm based on the particle swarm optimization (PSO), which is an iterative metaheuristics grounded on swarm intelligence. The obtained results show a high consistency between the MURAME outputs produced by the PSO-based solution algorithm and the actual scoring/ranking of the applicants provided by the bank (which acts as the DM).

Efficiency and Ranking of Indian Pharmaceutical Industry: Does Type of Ownership Matter?

This paper measures the technical efficiency, super-efficiency, slacks, and input/output targets for large Indian pharmaceutical firms according to ownership by applying Data Envelopment Analysis (DEA) approach. The paper uses raw material, salaries & wages, advertisement & marketing and capital usage cost as input variables and net sales revenue as output variable. The super-efficiency model is applied to rank firms on the basis of efficiency scores. The paper finds that mean overall technical efficiency scores of Private Indian and Private Foreign are higher than Group-owned firms, suggesting that type of ownership affects the performance of a given firm. Further, foreign firms were found to have minimum slacks in inputs, evidently owing to their superior technology, better engineering skills and managerial practices. The study suggests that the inputs, such as, advertisement & marketing expenditure, and also the usage of labour and capital are required to be utilized far more productively in order to improve efficiency.

Firm Characteristics, Industry Context, and Investor Reactions to Environmental CSR: A Stakeholder Theory Approach

We use an event study to capture the investor reaction to the first Newsweek Green Rankings in September 2009, a notable, multi-dimensional recent development in the rating of corporate environmental CSR performance. Drawing on stakeholder theory, we develop hypotheses about (a) market investor reaction to the disclosure of new, relevant corporate environmental performance in both the short and longer (6–12-month) term, (b) whether market investors’ reaction reflects industry context, and (c) whether firm-level contextual variables representing firm size, and market legitimacy significantly impacts the investor reaction. We find that, for the sample of the largest 500 US firms ranked by Newsweek, investors react positively both to the raw and within-industry rankings of green performance in terms of both short-term and longer-term (up to 12 months) returns. Moreover, the investor reaction is significantly influenced by contextual variables such as firm size and firm market legitimacy. Our results are compatible with the inference that rating agencies like Newsweek serve a valuable information dissemination function such that investors in better ranked firms anticipate larger future cash flows due to more positive reactions from key stakeholders such as environmentally-conscious customers, employees, NGOs, regulators, and thus reward these firms with stock price increases. Finally, larger, more visible firms benefit more, while firms which have more market legitimacy (represented by past financial performance) benefit less. We believe these findings will be of considerable interest to scholars of environmental corporate social responsibility.

Using the Rasch model to rank firms by managerial ability

Purpose – The purpose of this paper is to evaluate firm financial success across a broad range of performance measures and identify areas of the performance spectrum for which positive results were most difficult to achieve. Simultaneously, the authors identify the firms that most frequently ranked among the top five in terms of composite financial performance.Design/methodology/approach – The dichotomous Rasch model was applied to 13 financial ratios for two industries for the years 2002‐2011. Of these ratios, the authors identify those that are consistent with the requirements of the Rasch model and suitable for ranking composite firm financial performance in each industry during the sample years. Ratio difficulty rankings are obtained, along with firm rankings reflecting managers' ability to achieve broad‐based financial success.Findings – For the Foods and Aerospace/Defense industries during 2002‐2011, above average performance was most difficult to achieve in the areas of liquidity, financial leverag...

Better Workers Move to Better Firms: A Simple Test to Identify Sorting

We propose a test that uses information on workers’ mobility, wages and firms’ profits to identify the sign and strength of assortative matching. The basic intuition underlying our empirical strategy is that, in the presence of positive (negative) assortative matching, good workers are more (less) likely to move to better firms than bad workers. Assuming that agents’ payoffs are increasing in their own types allows us to use within-firm variation on wages to rank workers by their types and firm profits to rank firms. We exploit a panel data set that combines Social Security earnings records for workers in the Veneto region of Italy with detailed balance-sheet information for employers. We find robust evidence that positive assortative matching is a pervasive phenomenon in the labor market. This result is in contrast with what we find from correlating the worker and firm fixed effects in standard Mincerian wage equations.

Analysts' industry expertise

Industry expertise is an important aspect of sell-side research. We explore this aspect using a novel dataset of industry recommendations, which are often issued by strategy analysts. We study sell-side analysts' ability to rank industries relative to each other (across-industry expertise), and how it relates to analysts' ability to rank firms in a particular industry (within-industry expertise). We find that analysts express more optimism towards industries with higher levels of investment, past profitability, and past returns. Analysts exhibit across-industry expertise, as portfolios based on industry recommendations generate abnormal returns over both short and long horizons, beyond what would be explained by industry momentum. Additionally, industry recommendations contain information, which is orthogonal to the information revealed in firm recommendations, and more so for brokers who benchmark their firm recommendations to industry peers. Consequently, the investment value of sell-side analysts' recommendations is enhanced when both dimensions of industry expertise are utilized by considering industry and firm recommendations in combination.

Ranking Systemically Important Financial Institutions

We propose a simple network–based methodology for ranking systemically important financial institutions. We view the risks of firms –including both the financial sector and the real economy– as a network with nodes representing the volatility shocks. The metric for the connections of the nodes is the correlation between these shocks. Daily dynamic centrality measures allow us to rank firms in terms of risk connectedness and firm characteristics. We present a general systemic risk index for the financial sector. Results from applying this approach to all firms in the S&P500 for 2003–2011 are twofold. First, Bank of America, JP Morgan and Wells Fargo are consistently in the top 10 throughout the sample. Citigroup and Lehman Brothers also were consistently in the top 10 up to late 2008. At the end of the sample, insurance firms emerge as systemic. Second, the systemic risk in the financial sector built–up from early 2005, peaked in September 2008, and greatly reduced after the introduction of TARP and the rescue of AIG. Anxiety about European debt markets saw the systemic risk begin to rise again from April 2010. We further decompose these results to find that the systemic risk of insurance and deposit–taking institutions differs importantly, the latter experienced a decline from late 2007, in line with the burst of the housing price bubble, while the former continued to climb up to the rescue of AIG.

Environmental Policy, Rankings and Stock Values

ABSTRACTThis paper examines the impact of Newsweek's ‘The Greenest Big Companies in America’ on stock values for large companies. Newsweek ranks the biggest Companies in America from one to 500. An event window of ten days following the rankings release to the public was examined to analyze the impact of relative rankings on stock values. Dummy variables were constructed denoting firms ranked in the highest and lowest quartiles. Control variables included return to the Dow Jones Industrial Average, the firm's beta coefficient and total revenue. The main finding of the study is that inclusion in the top quartile of the rankings has a positive and statistically significant impact on firms' stock values, while the coefficient for the lowest quartile was not statistically different from zero. The results provide evidence of a positive impact on stock values from favorable environmental recognition but no effect for low ranked firms. Copyright © 2011 John Wiley & Sons, Ltd and ERP Environment.

Volatility Term Structure and the Cross-Section of Option Returns

The slope of the implied volatility term structure is positively related to future option returns. We rank firms based on the slope of the volatility term structure and analyze the returns for straddle portfolios. Straddle portfolios with high slopes of the volatility term structure outperform straddle portfolios with low slopes by an economically and statistically significant amount. The results are robust to different empirical setups and are not explained by traditional factors, higher-order option factors, or jump risk.

Internal Controls and Accounting Restatements Under Sarbanes-Oxley Regime: A Survey of Literature

The Sarbanes-Oxley Act 2002 of the U. S. was passed to instil investor confidence in financial reporting following the spectacular collapse of high ranking firms in the US. Sections 302 and 404 provide clear guidelines to both management and their auditors on their respective roles as well as stipulating the penalties for non-compliance. The role of internal controls failures in corporate collapses cannot be overstated; however, not much attention has been paid to it in the past. Thanks to this act, the role of internal control over financial reporting has been recognized for some time now as an important component of corporate governance for both management and auditors (Kinney, 2000). Using mainly electronic searches, this critical review has found that scholars do not agree over the significance of sections 302 and 404 on internal control over financial reporting. Since the ACT was passed to improve the quality of financial reporting and to bring back investor confidence in the capital markets, the apparent inconsistencies over its impact on companies, provides opportunities for further research, especially from the UK companies perspective.

Analysts’ Industry Expertise

Industry expertise is an important aspect of sell-side research. We explore this aspect using a novel dataset of industry recommendations, which are often issued by strategy analysts. We study sell-side analysts’ ability to rank industries relative to each other (across-industry expertise), and how it relates to analysts’ ability to rank firms in a particular industry (within-industry expertise). We find that analysts express more optimism towards industries with high levels of investments, past profitability, and past returns. Analysts exhibit across-industry expertise, as portfolios based on industry recommendations generate abnormal returns over both short and long horizons, beyond what would be explained by industry momentum. Additionally, industry recommendations contain information which is orthogonal to the information revealed in firm recommendations, and more so for brokers who benchmark their firm recommendations to industry peers. Consequently, the investment value of sell-side analysts’ recommendations is enhanced when both dimensions of industry expertise are utilized by considering industry and firm recommendations in combination.

The Dynamics of Going Public*

This paper develops a real options model in which firms may use the timing of their initial public offerings (IPOs) to signal the quality of their investment prospects to outside investors. When adverse selection is more relevant (cold markets), firms with better investment prospects accelerate their IPO relative to their perfect information benchmark to reveal their type to outside investors. When adverse selection is less relevant (hot markets), all firms issue simultaneously, issuers are younger on average, and IPO timing is uninformative. An extension with multiple signals and the empirical evidence show that better ranked firms are younger, issue a lower fraction of shares, and underprice more during cold markets, and that issuers are younger on average during hot markets.

The Quality of Securities Firms’ Earnings Forecasts and Stock Recommendations: Do Affiliation, Geography and Reputation Matter in China?

Using a unique database over local Chinese securities firm’s earnings forecasts and stock recommendations, it is shown that the average forecast error has decreased over time reflecting the maturing of the Chinese securities firms. Affiliated securities firms, defined as securities firms acting as investment banker/underwriter services, provide better earnings forecasts than un-affiliated firms which is contrary to findings from other countries. Also, forecast errors produced by local securities firms and star analysts are smaller. Finally single authored reports have larger forecasts errors than reports with several authors. In general financial markets react to stock recommendations from securities firms, but markets du not react differently to stock recommendations from affiliated and un-affiliated and local and non-local firms despite their superior earnings forecasts. As for affiliated firms, local securities firms provide better forecasts but these are not recognized by the financial markets in their reactions to stock recommendations. On the other hand financial markets react stronger to recommendations from highly ranked securities firms compared to lower ranked firms even though there is no difference in their ability to forecast earnings. Finally financial markets react stronger to stock recommendations by star analysts.

The Independent Effects of Environmental, Social and Governance Initiatives on the Performance of UK Firms

We investigate the effect of environmental, social and governance factors on the financial performance of a sample UK firms. We examine the three factors separately in order to disentangle the relation of each with financial performance. We find that, overall, there is no difference in the performance of firms which achieve high or low environmental, social or governance rankings. Additionally, high and low ranking firms do not appear very different in terms of their systematic risks, book-to-market ratios or momentum exposures. However, high-rated firms are consistently larger in size. Our results indicate that UK investors are free to incorporate environmental, social or governance information into their investment strategies without incurring any significant financial cost (or benefit) in terms of risk or return.

Post-Stock Performance of Bailout Acquisitions in Japan: A One Decade Experience

In this paper, we found a strong positive post-rescue performance for acquiring firms. Furthermore, we observed even more dramatic recovery effects when we focused on accounting accrual components, such as the credit sale increases or reduction of PPE depreciation value. We found that investors have been dubious with the solvency of the troubled firms at least one year before the announcement date of their acquisition. As a result, they sold the troubled firms’ stocks heavily leading to sluggish sales that hover at a considerably low level during a one year period. However, once they are rescued by an acquiring firm, the target firm’s business recovers dramatically. Focusing on accounting accrual components (changes in ratio of receivables to total assets for one year preceding the rescue), we found a 35.92% average difference for three-year CARs between the highest and lowest ranked firms (reversed out into the acquiring firm’s stock appreciation). We also found a 35.29% average difference for three year CARs between high vs. low firm ratio changes of depreciation costs against total assets for the year preceding the announcement. Finally, we found the reversal effect on troubled firms who underwent a large stock sell-off, and found that a greater stock sell-off is strongly correlated to a more drastic reversal for the acquiring firm’s stock appreciation after buyout.

The pricing of conservative accounting and the measurement of conservatism at the firm-year level

This paper analyzes the relation between equity prices and conditional conservatism and introduces a new measure of conservatism at the firm-year level. We show that the asymmetric properties of conservative accounting, the existence of non-accounting sources of information, and the properties of GAAP related to special items combine to generate a nonlinear relation between unexpected equity returns and earnings news (the shock to expected current and future earnings). Based on this model, we construct a conservatism ratio (CR) defined as the ratio of the current earnings shock to earnings news. CR measures the proportion of the total shock to expected current and future earnings recognized in current year earnings. Ranking firms according to CR, we show empirically that higher CR firms have more leverage, increased volatility of returns, more incidence of losses, more negative accruals, and increased volatility of earnings and accruals, consistent with the literature on conservative accounting.

The accruals anomaly – can implementable portfolio strategies be developed that are profitable net of transactions costs in the UK?

In this paper, we provide evidence related to the existence, or otherwise, of the accruals anomaly in the UK stock market. Specifically, we find that average annual abnormal returns generally decline as prior period accruals move from low to high. This outcome can be interpreted as broadly consistent with the accruals anomaly via which investors overweight the persistence of accruals and underweight the persistence of cash flows in predicting next period's earnings. Our results suggest that to make money out of any mispricing based upon ranking firms by accruals generally requires a portfolio strategy with long and, in particular, short positions in portfolios featuring relatively small capitalisation firms. When taking into account conservative estimates of trading costs, the investment strategy is seen to generate losses if an initially equally‐weighted investment approach is used or positive, but not statistically significant, abnormal returns if a value‐weighted approach is followed. Overall, we conclude that, whilst there is evidence of mispricing consistent with the accruals anomaly, the profitable exploitation of the anomaly is not necessarily possible when transactions costs are taken into account. Thus, the accruals anomaly is not so egregious in the UK as to challenge the semi‐strong version efficient markets hypothesis.

The Dynamics of Going Public

This paper develops a real options model in which firms may use the timing of their IPOs to signal the quality of their investment prospects to outside investors. When adverse selection is more relevant (cold markets), firms with better investment prospects accelerate their IPO relative to their perfect information benchmark to reveal their type to outside investors. When adverse selection is less relevant (hot markets), all firms issue simultaneously, issuers are younger on average, and IPO timing is uninformative. An extension with multiple signals and the empirical evidence show that better ranked firms are younger, issue a lower fraction of shares and underprice more during cold markets, and that issuers are younger on average during hot markets.