Firm Returns Research Articles

The unintended cost of data breach notification laws: Evidence from managerial bad news hoarding

AbstractWe investigate how nonfinancial disclosure laws exacerbate agency issues in firms. Our analysis focuses on the staggered adoption of state‐level notification laws that require firms to disclose data breaches. Our findings reveal that the introduction of these laws increases the risk of stock price crashes. Managers appear motivated to accumulate unfavorable news in an effort to prevent market overreactions associated with the mandatory disclosure of data breaches. Cross‐sectional analyses also reveal that the impact is stronger when managers have a greater incentive, or greater ability, to hoard information. Our results highlight that nonfinancial disclosures can have unintended consequences for firm information asymmetries and potentially adverse market impacts in cases where the regulation is unable to consider all stakeholders.

More is less? Wealth effects of Italian stocks to the increase in allowed voting rights

To address the steadily declining numbers of listed companies, several European countries are going to allow the issuance of dual class shares. However, there is skepticism among corporate governance experts whether this is an attractive option to increase the number of IPOs. To evaluate this new rule, the Italian stock market offers a unique natural experiment. We investigate the wealth effect for Italian shareholders to the announcement of this increase in allowed voting rights. Our results show significant negative abnormal returns for firms with dual class shares, thus indicating an aversion of investors towards an asymmetrical distribution of voting rights.

기업의 ESG활동이 신용등급에 미치는 영향: 국내 기업 적용사례

ESG management gradually becomes one of major issues in global firms these day, and this phenomenon is not exception for Korean firms and they make use of ESG management in thier decisions in raising capital and investment. Although initially they focused on the improvement of firm image and firm value through ESG management, many studies support the fact that firms gradually recognize that ESG is very essential for the survival and sustainable growth. This study investigates the trend of the increase of ESG bonds in Korea and analyzes the impact of ESG management on the credit ratings and risk management of firms. Then, through the case studies for Korean firms, we draw some useful implications for the investment strategy for the investors, the credit risk management for the firms, and policy makings about credit ratings for the government.

The conceptual model of the national blue economic system and its modeling principles: A supernetwork perspective

The national blue economic system is a complex system formed by the correlation of different agents, such as related blue industries, blue products, blue firms and blue provinces in a country. Its essence can be regarded as a complex system formed by the interconnection of a variety of heterogeneous networks. The supernetwork is an important method for studying such multilevel, multidimensional and multiagent correlation problems in network science. This method can effectively assess the intra- and interrelationships of each element entity. This paper incorporates the multielement entities in the national blue economic system into this multilayer network framework for systematic analysis and decomposes the development issue of the blue economy into the development issues of blue industries, blue products, blue firms and blue provinces. On this basis, this paper analyzes the conceptual model of the national blue economic system space, qualitatively describes the intra- and interexport relationships among multifactor entities in national blue economic development from the perspective of the multilayer network, and expounds the modeling principle of the national blue economic system space. This supernetwork approach provides effective new methods and tools for countries to study the development of the blue economy and formulate corresponding policies to achieve blue growth.

Revitalizing warehouse management to enhance global manufacturing competitiveness: insights from South Africa

Company operations and global trade necessitate storage. Warehouse management is essential for meeting customer expectations, ensuring product availability, and delivering globally swiftly and affordably. A company's international competitiveness can suffer from warehouse instability. This study assesses warehouse performance for competitive advantage. The report also explores top management's disregard for warehouse management's impact on manufacturing competitiveness. This paper reviews warehouse management system research from several industries. Reviewing literature for gaps and flaws. Quantitative methods include industrial specialized surveys. Three varied South African manufacturing enterprises will be case-studied. Deduction is used to analyze industry expert consultation data. Due to its accessibility and data collection suitability, convenience sampling was employed to choose participants. This study discovered many warehouse management issues in South African industrial firms. Integration and automation are lacking in current systems, hampering global competitiveness. Warehouse movements and infrastructure damage increased without zone selection. Technology-illiterate warehouse workers slowed operations. The study offers zone picking, warehouse training, and warehouse system integration and automation to address these difficulties. South African industrial firms should strengthen warehouse management systems, according to this study. These organizations can enhance operational efficiency, save money, and compete globally with the suggested changes. Zone picking, warehouse system integration, and worker technical training can alleviate challenges and provide companies an edge. This study highlights warehouse management's often overlooked significance in manufacturing competitiveness. International organizations can do better by studying warehouse management system problems and solutions. Practical warehouse management advice from this study increases South African industry competitiveness.

Unexpected management forecasts and future stock returns

AbstractThis study investigates the effect of managerial discretion regarding initial earnings forecasts on future stock returns for Japanese firms. We estimate the unexpected portion of initial management earnings forecasts (“unexpected forecasts”) based on the findings of fundamental analysis research and define it as a proxy for forecast management. Using this measure, we find that firms with higher unexpected forecasts are related to negative abnormal returns over the subsequent 12 months. By contrast, the expected portion of earnings forecasts is not related to future abnormal returns. These results suggest that the market tends to appropriately price the credible portion of management forecasts, while overpricing the less credible portion. Further analysis reveals that the relationship between unexpected forecasts and future returns is (1) distinct from accruals anomaly, notably (2) in the 6‐month return window, (3) in the first half of the sample period (especially in 2005 and 2006), (4) in extreme unexpected forecast news and (5) in a poor information environment. This study extends the literature by focusing on a more desirable research setting in Japan, compared to other studies, to explore management forecasts and present new implications for the market pricing of management earnings forecasts.

Construction, Real Uncertainty, and Stock-Level Investment Anomalies

Abstract We show that the negative relation between real investments and future stock returns is primarily driven by the subsample of firms building additional capacity. We develop a real options model to rationalize that evidence based on the premise that firms need to learn how to best operate modern capacity vintages, inducing idiosyncratic uncertainty in that capacity’s production costs over the learning period. Conversely, the uncertainty lowers the expected return of firms with newly built capacity until it is resolved. Further evidence based on profit sensitivities to aggregate conditions; analyst forecast-error volatilities; and high- versus low-tech industry subsamples supports our uncertainty explanation.

Asset pricing implications of firms' profit sharing

This study examines the asset pricing implications of a profit-sharing policy by measuring a profit-sharing coefficient (PSC) that captures the firm's tendency to share profits with its employees. We find that firms with a high PSC earn higher future stock returns than firms with a low PSC. This arises because investors underestimate the positive effects of PSC on worker productivity while overreacting to the potential costs due to the high PSC. We further reveal PSC to be inversely associated with firm risk by showing that the earnings and stock returns of high-PSC firms are less sensitive to aggregate risk than those of low-PSC firms.

ESG ratings and macroeconomic risks in the Asian emerging stock markets

ABSTRACT We examine how equity returns of ESG-rated firms in the emerging Asian market respond to the impact of macroeconomic shocks. By studying companies across nine emerging Asian countries, we find no evidence of an outperforming pattern in the stock returns of strong ESG-performing firms. However, we observe that strong ESG-performing firms tend to have less volatility in their equity returns, while weak ESG-performing firms exhibit more volatile equity returns. When it comes to the influence of macroeconomic factors on ESG-rated firms, we highlight the significant impact of demand shocks on the stock values of ESG companies, especially in the case of weaker ESG firms. Thus, our findings suggest that in emerging markets, firms with high ESG ratings tend to safeguard their equity prices against demand shocks and fluctuations in equity values, setting them apart from their low ESG-rated counterparts.

Family firms, management control and digitalization effect

Purpose This study investigates the association between family firm status and the maturity level of management control systems (MCSs) by considering the moderating effect of process digitalization.Design/methodology/approach The authors conducted an empirical analysis on a sample of 106 Italian firms, utilizing both ordinary least squares and ordered logistic regression in this study.FindingsBy resorting to the MCS maturity model proposed by Marx et al. (2012), the empirical findings reveal that family firms do not differ from their nonfamily counterparts regarding MCS maturity. Furthermore, the degree of process digitalization is positively associated with the probability of adopting IT-related technologies in MCSs. Digitalization negatively moderates the relationship between family firm status and MCS maturity, resulting in family firms exhibiting a lower MCS maturity level than their nonfamily counterparts.Research limitations/implications Despite similar efforts in the digitalization process, family firms lag behind in the adoption of IT-enabled MCSs, which suggests that reduced agency issues in family firms constrain the MCS maturity level.Practical implications This study can assist practitioners in implementing a more mature MCS by considering the interplay between internal digitalization processes and family status of the firm, thereby enhancing the decision-making process.Originality/value This study adds novelty to an underexplored area at the intersection of MCSs, family firms and digitalization.

Geographic links and predictable returns

AbstractUsing establishment‐level data of U.S. public firms, we construct a novel measure of geographic linkage between firms. We show that the returns of geography‐linked firms have strong predictive power for focal firm returns and fundamentals. This effect is distinct from other cross‐firm return predictability and is not easily attributable to risk‐based explanations. It is more pronounced for focal firms that receive lower investor attention, are more costly to arbitrage, and during high sentiment periods. The cross‐firm information spillovers and return predictability are also stronger for geographic peers with economic linkages and with positive information. Our results are broadly consistent with sluggish price adjustment to nuanced geographic information.

Short run performance of initial public offerings in Nepal

This paper examines the under-pricing and performance of IPO for six months period using the model of under-pricing. Overall, 67 samples are analyzed out of 120 population identified from the period of 2014/15 to November 2020/21 using judgmental sampling and removal of outlying observations. Firm size, subscription rate, issue size, age of firm, issue manager reputation and market condition are taken as independent variables. Nepalese investors mainly prefer microfinance sector for investment and tends to be underpriced for longer period due to high demand for share. Observations are classified into two categories based on mean value of each predicting variable and NEPSE index. Significant difference on initial as well as monthly return has been observed between categories of subscription rate (high versus low) and age (matured versus young). Highly positive and significant correlation between the issue size and firm size shows large firm issue IPO in large size and negative significant correlation between issue size and subscription rate shows when issue size is low there will be high demand for shares. Significant relationship of subscription rate and age of firm for initial and first month return has been observed whereas only subscription rate was found significant after second month to sixth month. Study concludes that subscription rate is major determinant of under-pricing of IPOs in the Nepalese Stock Market.

What determines the performance of pharmaceutical firms in India on account of COVID-19 interventions?

PurposeThis paper aims to examine the impact of announcements related to 77 interventions by 46 listed Indian pharmaceutical firms during COVID-19 on the abnormal returns of the firms. The study also finds the variables which explain cumulative abnormal returns (CARs).Design/methodology/approachThis study uses standard event methodology to compute the abnormal returns of firms announcing pharmaceutical interventions in 2020 and 2021. Besides this, the multilayer perceptron technique is applied to identify the variables that influence the CARs of the sample firms.FindingsThe results show the presence of abnormal returns of 0.64% one day before the announcement, indicating information leakage. The multilayer perceptron approach identifies five variables that explain the CARs of the sample companies, which are licensing_age, licensing_size, size, commercialization_age and approval_age.Originality/valueThe study contributes to the efficient market literature by revealing how firm-specific nonfinancial disclosures affect stock prices, especially in times of crisis like pandemics. Prior research focused on determining the effect of COVID-19 variables on abnormal returns. This is the first research to use artificial neural networks to determine which firm-specific variables and pharmaceutical interventions can influence CARs.

Does digital transformation curb the formation of zombie firms? A machine learning approach

ABSTRACT Based on the dynamic capability view theory, we examined the impact of digital transformation (DT) on zombie firm formation using a sample of listed Chinese firms. Through textual analysis of firms’ annual reports, we categorized DT into three dimensions: strategy, technology (i.e. artificial intelligence, blockchain, cloud computing, and big data), and application. Then, we employed 11 machine learning algorithms to detect zombie firms, compared the prediction performance, and calculated the contribution of each DT indicator. The results show that DT can effectively curb the formation of zombie firms. Specifically, big data contributes the most to suppressing the prevalence of zombie firms, followed by artificial intelligence, cloud computing, and DT application. Nevertheless, DT strategy and blockchain cannot reduce zombie likelihood. Finally, our research offers valuable insights for policymakers to address the issues of zombie firms.

Impact of Firm’s Fundamentals on Return of Stocks in Nepal

Return on stock is the chief concern of firm investors. Investors prefer better stock returns, and management focuses on increasing stock returns for wealth maximization. Internal factors are the firm fundamentals, and external factors are various macroeconomic variables that influence stock returns. This paper uses descriptive and causality research designs to examine the impact of firm fundamentals on stock returns in Nepal for the fiscal year 2007/08-2021/22. In this paper, the dependent variable is stock return and firm fundamentals such as earnings per share (EPS), book-to-market equity (BME), size of market value of equity (lnME), cash flow yields (CFY), and earning yield (EY) are used as explanatory variables. The correlation result shows that EPS, BME, and EY have positive relationships, and lnME and CFY have negative relationships with stock returns. The regression results reveal the positive impact of EPS, BME, and EY on stock returns in Nepalese firms. This indicates that higher EPS, BME, and EY lead to increased firms’ stock returns. Further, the result reports that lnME and CFY have an inverse influence on returns. Finally, the finding concludes that earnings per share, book-to-market equity, size of market value equity, and cash flow yields are strong, but earnings yield has a weak impact on the stock returns of firms in Nepal. Policymakers, investors, and academicians can implement the findings of this study for effective formulation and application of policies, maximize stock returns, and research activities.

Tone of narrative disclosures and earnings management: UK evidence

This paper investigates whether a relationship exists between the tone of narrative disclosures and engagement in earnings management activities. Using FTSE all-share nonfinancial firms, our estimates show a significant association between the tone of narrative disclosure (measured by the percentage of positive words, negative words, and net tone) and the prevalence of earnings management. The results also suggest that manipulating firms, which represent extreme cases of earnings management, are more likely to use less negative tone to conceal their fraudulent practices. In contrast, non-manipulating firms tend to use more positive tone to mask their involvement in managing earnings. Additionally, the paper examines the market reaction to both earnings management and the tone of narrative disclosure. The findings reveal that earnings management and net tone are positively associated with abnormal market returns for non-manipulating firms, but have no significant association for manipulating firms. Overall, the paper highlights the important role of the tone of narrative disclosures in providing clarity to the numbers presented in annual reports.

Impacts of regulatory strategies on member’s knowledge sharing in virtual brand communities based on ecosystem-oriented business models in China

ABSTRACT As an open platform to connect multiple parties, virtual brand communities are a typical application of the ecosystem-oriented business models (EBM) developed by enterprises to coordinate the participation of various stakeholders in value co-creation. Knowledge sharing among users is the core activity of EBM-driven virtual brand communities, and it is an important issue for focal firms to monitor and incentivize knowledge sharing among users through effective regulatory strategies. To address this need, this paper splits regulatory strategies into two dimensions: deviant behaviour monitoring and engagement behaviour recognition and studies how the above two dimensions affect members’ knowledge sharing according to the mediating effect of members’ relational social capital. Results indicate that engagement behaviour recognition positively affects knowledge sharing via mediation of trust, reciprocity norms, and obligation norms in all three dimensions of social capital. Deviant behaviour monitoring positively affects knowledge sharing via mediation of trust and obligation norms in two dimensions of social capital. This paper provides new insights into the mechanism between regulatory strategies and members’ knowledge sharing in virtual brand communities driven by EBM and is of reference for managers to inspire knowledge sharing and regulate EBMs.

Impact of Corporate ESG Performance on Equity Returns

In the context of sustainable development, ESG is no longer a theoretical concept, but is gradually put into practice. Corporate decision makers, market investors and regulators are all attach more and more attention to ESG information. Whether the efforts made by companies in ESG can bring the companies due returns? Whether excellent ESG performance attracts investors and brings them excess returns? Whether ESG information can help regulators to promote a stable and growing market? This paper uses Bloomberg ESG data and a sample of 242 companies from 2011 to 2020, to answer these questions. This study finds that ESG performance does not generate positive returns for firms and investors. Furthermore, for state-owned enterprises and heavily polluting firms, the sacrifices made in ESG performance are greater. This study theoretically analyses the reasons for the negative correlation between the two research subjects. It alerts the tripartite participants to look at ESG disclosure information in a critical way.

Impact of Accounting Conservatism on the Informativeness of Current Stock Prices for Future Earnings

Purpose: The purpose of this paper is to examine how accounting conservatism affects the relation between current stock returns, current earnings, and future earnings.
 Design/methodology/approach: To achieve the purpose of this paper, we divide accounting conservatism into con-ditional and unconditional conservatism and investigate whether the relation between current stock returns, current earnings, and future earnings is different depending on the type of conservatism.
 Findings: We find that the current stock returns of firms with strong conditional conservatism contain more in-formation about future earnings. However, our results show that informativeness of current stock returns on future earnings does not change under unconditional conservatism. 
 Research limitations/implications: Even though we use prior research to capture the proxy for accounting con-servatism, the extent or magnitude of accounting conservatism may not be properly measured by our proxies. However, despite of these limitations, our results still have the following meanings.
 Originality/value: Our results suggest that compared to unconditional conservatism, conditional conservatism re-flects managerial discretion over timely recognition of bad news and results in faster recognition of the impact of future earnings on current earnings. More specifically, our result indicates that conditional conservatism decreases the informativeness of current stock returns for future earnings due to asymmetric timeliness. And our result also provides indirect evidence that conditional conservatism reflects managerial discretion over timely loss recognition compared to unconditional conservatism, and thereby, deteriorates the informativeness of current returns for future earnings.

Do Markets react to Government and Stock Exchange-Disclosed ESG regulations and policies through Banks and Public Firms?

This paper studies how financial markets react to ESG-related policies proposed by governments or relevant regulatory authorities by examining abnormal returns of public firms and banks. With ESG being a growing field ever since increased attention has been paid to social and environmental issues specifically, assessing the way markets perceive enforcements to adopt these practices is a valuable way to gain insight into whether they will eventually include them in their business models or not. The study uses data from Yahoo Finance and looks at 6 different regulations to assess this market reaction by developing python models to calculate the respective abnormal returns. The results show how these reactions can be generally positive or negative, and are heavily dependent on the specific regulation, the region, as well as the institution analyzed – public firms or banks. The broader implications of this paper lie in its expandability and the way further studies can be conducted with more firms and regulations to see more distinct factors emerge.