Short-term Firm Performance Research Articles

The paradoxical impact of CEOs’ humility and narcissism on absorptive capacity: evidence from small firms

Purpose Because small firms are dependent on external knowledge to overcome various constraints, absorptive capacity (ACAP) is an important capability from a knowledge management perspective. Furthermore, extant research has noted the seemingly contradictory yet potentially complementary interaction of Chief Executive Officer (CEO) traits – humility and narcissism on knowledge management. This study aims to explore the impact of CEO humility and narcissism on ACAP and short-term firm performance. Design/methodology/approach This paper uses a quantitative approach using multisource data from small Indian firms comprising survey responses from 225 CEOs and 216 general managers of small automotive firms. The data were analyzed using partial least squares – structural equation modeling. Findings This paper sheds new light on the process through which small firms build ACAP and the role of CEO leadership traits in this regard. This study finds that in a highly turbulent environment, CEO’s humility and narcissism affect the development of a small firm’s ACAP. This study also discusses important implications for managerial practice and policy making. Originality/value To the best of the authors’ knowledge, this is the first study to empirically examine the impact of the paradoxical leadership traits of narcissism and humility on the short-term performance of small firms, from a knowledge-based perspective through the lens of absorptive capacity.

The effect of corporate social responsibility hybridity on firm performance: moderating role of aspirational talk

PurposeThis study explores a novel conception of corporate social responsibility (CSR) hybridity and investigates its effect on returns following CSR announcements and the moderating role of aspirational CSR talk.Design/methodology/approachBased on an event study of 136 Chinese companies’ CSR announcements, this study empirically insights into an overall tension between the short-term firm performance (FP) loss and medium-term FP success of CSR hybridity.FindingsFirst, CSR hybridity has a negative impact on short-term FP. Second, although there is positive effect on medium-term FP, this influence is not permanent. Third, aspirational CSR talk has a moderating role on the positive relationship between CSR hybridity and FP. These results point to the unique features of hybridity that require time to diffuse the impacts.Originality/valueFirst, by adopting new concept of CSR hybridity, this study contributes to the literature by considering better solutions to integrate strategic CSR. Second, by investigating the complexity of the CSR hybridity–FP dialogue, the results provide insights into the questions of why and when organizations could be incentivized to adopt hybrid CSR approaches. Third, this study contributes to the CSR–FP and stakeholder literature by demonstrating that aspirational talk is key in CSR’s medium-term success. The implication of this is a growing pressure on companies’ CSR communications with investors through managerial talk that depicts organizational ambitions for CSR engagement.

Working capital management under supply chain disruption: The role of government response during economic uncertainty

Supply chain finance (SCF) stems from supply chain management (SCM), where firms deploy various approaches (e.g., inventory management and working capital management) to maximize firm performance. Firms utilize working capital management (WCM) to optimize their operating cash to create firm value. This study focuses on how firms could deploy the WCM approach through receivables, inventories, and payables to maximize long-term and short-term firm performance. It is worth noting that the components in WCM serve different roles in firm performance where shareholders value shorter receivable periods to avoid customer default risk, but firms could benefit from long receivable periods for short-term operation performance. In addition, governments from various countries implemented different policies to reduce adverse economic impacts of the pandemic. The sample includes publicly listed manufacturing companies in the United States, the United Kingdom, Singapore, and Australia where different levels of government response have been observed. By using Ordinal Least Squares (OLS) regression analysis and adopting government policy as moderator, the results show that the government actions during the pandemic serve as the mitigating effect in the manufacturing supply chain. The analyses also show that the government policies implemented have successfully supported supply chain resilience during pandemic, especially to loss-making firms from decreased firm value.

Executive compensation horizon incentives, performance targets, and auditor risk assessment

Shorter compensation duration can induce executives to act myopically and manage earnings to boost short-term firm performance. Such earnings management activities increase financial statement misstatement risk and, therefore, audit risk. Using audit fees as a proxy for auditors’ risk assessments, we investigate whether auditors consider executives’ compensation horizon incentives in assessing audit risk. We find that shorter executive compensation duration is associated with higher audit fees. However, auditors also consider other elements of the executive compensation contract when assessing audit risk. Specifically, we find that when executive compensation includes performance-vesting grants, auditors pay less attention to compensation duration and perceive companies that meet or just beat performance targets as riskier (and thus charge them higher fees). Overall, our findings suggest that auditors adopt a nuanced approach to the audit risks posed by executive compensation contracts.

Is short-term firm performance an indicator of a sustainable financial performance? Empirical evidence

PurposeThis study aims to thoroughly examine and understand the relationship between working capital management (WCM) and the sustainable financial performance (FP) in the context of the New Zealand companies listed on stock exchange.Design/methodology/approachThis study has applied various regression techniques to examine WCM and the sustainable FP relationship. The data set period is from 2009 to 2019. The results are robust upon various layers of robustness parameters. The system-generalized method of moments is applied for managing endogeneity issue.FindingsThe research reveals compelling evidence of a meaningful connection between WCM and sustainable FP indicators. The study specifically highlights the significant negative associations between the cash conversion cycle, average collection period and average age of inventory with the firm’s sustainable FP. Through robust analyses and various parameter adjustments, the study ensures the credibility and reliability of its conclusions, further reinforcing the impact of WCM on the financial health of New Zealand-listed firms.Practical implicationsThis study provides future directions for researchers to explore the dynamic relationship between WCM and a firm sustainable FP because it is still a demanding and challenging area. Future research may care to explore the optimal way to reduce the cash conversion cycle, average collection period and average age of inventory for New Zealand firms. The current study does provide insights to NZ financial managers, which is useful for improving sustainable FP by efficiently managing WCM.Originality/valueWCM is problematic and constitutes a notable challenge; it requires further research, especially in small economies such as New Zealand. Hence, it is an updated and fresh attempt based on a larger data set to measure the empirical relationship between WCM and the sustainable performance of New Zealand-listed firms. Furthermore, the current study uses dynamic panel data estimation techniques in addition to multiple regression techniques.

Entrusted investment in China: Firm characteristics and economic consequences

Using a large sample of China's listed firms from 2001 to 2018, we investigate the determinants and consequences of entrusted investment in China. We find that firms with more idle funds and weaker corporate governance are more likely to engage in entrusted investment (EI). We also find that the stock market reacts positively to entrusted investment announcements. Further, EI improves short-term firm performance but has no effect in the long run. One possible reason is that EI reduces corporate R&D investment, which may have a negative impact on long-term performance. Finally, we find that the positive association between EI and short-term firm performance becomes more significant for firms without overseas experienced executives and non-high-tech firms. This study enriches the literature on the EI and corporate finance, and the findings have important implications for regulators, listed firms, and investors.

Beneficial or Detrimental? The Relationship Between Mandatory CSR Disclosure and Firm Performance

Using a sample of listed Chinese companies for the period 2003–2015, this study investigates the relationship between mandatory CSR disclosure and financial performance. To better clarify the mechanism between mandatory CSR disclosure and financial performance, this paper employed a dual model of financial performance, that is, short-term and long-term financial performance. The results suggest that mandatory CSR disclosure has a negative impact on short-term performance, but a positive impact on long-term performance. Moreover, this study found that corporate environmental investments mediate the relationship between mandatory CSR disclosure and short-term firm performance; the community-related, employee-related, and environmental CSR strategies mediate the relationship between mandatory CSR disclosure and long-term firm performance. The implications and future research directions are discussed.

More Bang for Their Buck: Why (and When) Family Firms Better Leverage Corporate Social Responsibility

Family firms take different strategic actions because of their desire to grow and preserve socioemotional wealth (SEW), but pursuing SEW also generates what we call SEW resources that deliver advantages in certain contexts. We develop and test this idea with respect to corporate social responsibility (CSR). We theorize that SEW resources such as reputation, strong stakeholder relationships, and long-term orientation help family firms better leverage symbolic CSR to enhance short-term firm performance and better leverage substantive CSR to enhance long-term firm performance. Regression analyses on a 20-year panel of S& P 500 firms provide supportive evidence. Findings indicate that family firms not only “do it differently” to preserve SEW; they sometimes “do it better” because of SEW.

Do energy policies bring about corporate overinvestment? Empirical evidence from Chinese listed companies

In an era of profound changes in the global economic and industrial landscape, the ability of renewable energy policies to create new growth drivers is critical to achieving China's economic recovery in the post-COVID-19 period. Consequently, this paper empirically examines whether renewable energy policies bring about corporate overinvestment. Using corporate investment data and hand-curated information on energy firms from Chinese listed companies from 2007 to 2018, the results show that implementing renewable energy policies causes firms to overinvest. Renewable energy investment is more of a government-led industrial policy, reflecting how local governments increase their degree of intervention in firm investment, leading to overinvestment and better short-term firm performance. However, in the long run, the overinvestment encouraged by renewable energy policies will more negatively impact the economic performance of state-owned enterprises (SOEs). Moreover, when economic policy uncertainty is high, renewable energy policies can lead to a more pronounced tendency for firms to overinvest. Despite this trend, renewable energy policies do not significantly increase the likelihood of overinvestment among firms with high state-owned or equity concentration but instead allow firm operators to make more rational investment decisions. Thus, the government should formulate policies to regulate the investment process of enterprises and avoid distorting their investment behavior when providing financial support and preferential policies.

Executive pay dispersion: Reconciling the differing effects of pay inequality and pay inequity on firm performance

Debate persists regarding the effects of executive pay dispersion on firm performance given that conflicting findings have plagued the literature. We aim to reconcile previous inconsistencies by taking a more nuanced approach and exploring the effects of explained and unexplained executive pay dispersion on the firm’s short- and long-term performance. Using a longitudinal sample of public firms over a 12-year period, we find that unexplained pay dispersion among executives—indicating pay inequity—negatively affects short-term firm performance while explained pay dispersion—indicating pay inequality—positively affects long-term firm performance. The findings help resolve prior inconsistencies associated with understanding the relationship between executive pay dispersion and firm performance. Accordingly, we advance research by demonstrating the importance of measuring pay dispersion types and accounting for the temporal nature of firm performance.

Distributional differences in the time horizon of executive compensation

The aim of executive compensation plans is to incentivize executives to maximize long-term firm value. Past research shows that executives’ pay is determined by short-term stock performance to a substantial degree. This paper tests for distributional differences in the time horizon of the performance–pay relation, controlling for executive-firm fixed effects in a quantile regression framework. I identify short-term and long-term firm and industry performance using a filter and estimate distributional differences in the short-term and long-term performance–pay relation using method of moments–quantile regression (Machado and Santos Silva in J Econ 213:145–173, 2019). I find the right tail of the conditional total compensation distribution has a more long-term-oriented performance–pay relation than the left tail. By contrast, the right tail of the conditional accumulated wealth distribution has more short-term-oriented performance–pay relation than the left tail. Results show that asymmetry in short-term firm performance–pay relations may exist, but do not vary across the conditional distribution.

Corporate Capital Structure and Firm Value: International Evidence on the Special Roles of Bank Debt

We contribute to the corporate capital structure and bank specialness literatures by studying the effects of bank debt on corporate value. We apply novel methodology to almost 60,000 firms in 110 countries over 17 years—over 300,000 total observations. We find that bank term loans and credit lines are strongly positively associated with firm value, but only when employed very intensively—at 90% or more of total corporate debt. These effects are consistent with bank specialness at high-intensity levels. These findings support previously untested theoretical predictions that bank specialness would be stronger or exist only at high bank debt intensities. Our results hold broadly but are stronger for credit-constrained firms—small firms and those in low-income countries. Channel analysis suggests that term loans boost short-term firm performance more, while credit lines better promote long-run growth. The findings suggest future research topics and have policy implications, particularly during the COVID-19 crisis.

Board Diversity and Performance of Philippine Firms: Do Women Matter?

The issue of gender diversity on corporate boards is attracting research interest because of purported contributions of women directors, including improved monitoring, ethical focus, and democratic leadership. This rationale forms part of the economic case for women’s participation on corporate boards, as opposed to alternative arguments based on social or equality considerations. In this study, we examined the effect of board diversity for Philippine firms during the period 2003 to 2014. Using an unbalanced panel of 2648 firm-years, we found that greater board diversity did not significantly affect either short-term firm performance or long-term firm value. Our findings show that female and male corporate leaders have comparable competency levels and that increasing women’s presence on corporate boards has no discernible effect on firm performance.

Can open innovation improve firm performance? An investigation of financial information in the biopharmaceutical industry

ABSTRACTOver the past decade, open innovation has seemingly become the dominant approach for revitalising a company’s innovation process. Can open innovation improve firm performance? This study optimises the measures for open innovation based on existing literature and by considering the actual situation in China. We draw conclusions from an analysis of 516 annual reports and data from Wind of 172 biopharmaceutical companies from 2013 to 2015. Result indicates that open innovation strategies have different effects at different times: (1) Inbound open innovation has a negative impact on short-term (1–2 years) firm performance, but an inverted U-shaped curvilinear relationship will develop after about 3 years. (2) Outbound open innovation has a negative impact on short-term firm performance, but leaves a positive effect in the long run. Therefore, enterprises should maintain a moderate inbound open innovation level and improve the degree of outbound open innovation to improve long-term performance.

The Effects of TMT Faultlines and CEO-TMT Power Disparity on Competitive Behavior and Firm Performance

Although upper echelons scholars have drawn from the demographic faultlines concept to study top management team (TMT) subgroup dynamics, the effects of TMT faultlines on competitive behavior and performance outcomes have not been well documented. To gain greater insight, we develop a model that connects TMT faultlines, CEO-TMT power disparity, competitive behavior, and firm performance. We hypothesize that TMT faultlines and CEO-TMT power disparity jointly determine a firm’s competitive aggressiveness and simplicity, and these two competitive behaviors influence firm performance. Using a sample of 295 U.S. firms in 146 industries from 2000 to 2013, our findings indicate that (a) TMTs with strong faultlines take fewer and simpler competitive actions, and CEO-TMT power disparity further worsens the negative effect on the volume of competitive actions, and (b) fewer and simpler competitive actions benefit short-term firm performance; however, they hurt the long-term firm performance trend. These findings contribute to the upper echelons and competitive dynamics research and suggest important managerial implications.

Double-edged sword effect of independent innovations and foreign cooperation: evidence from China

How do independent innovations impact firm performance? Based upon exploratory learning perspective, we argue that independent innovations will exhibit a double-edged sword effect on firm performance over time. Further, we view cooperation with foreign partners as complementary assets, and examine the dynamical moderating effect of such complementary assets on the relationship between independent innovations and firm performance. By analyzing a sample of Chinese firms, we find that independent innovations can enhance long term firm performance, but dampen short term firm performance. Further, our results show that cooperating with foreign partners as complementary assets will improve the relationship between independent innovations and firm short term performance.

Economic Crisis, Acquisitions and Firm Performance

This paper examines the effects of the recent economic crisis, relative to the pre-crisis period, on firm acquisition behavior and how such behavior impacts short-term firm performance. We develop hypotheses on how firms adjust their geographic and product market scope in response to the economic crisis. Using data on acquisitions in Italy during the period 2007–2010, we analyze whether firms use acquisitions to enter and/or expand the firm’s presence in different product markets and different geographic markets before and during the economic crisis. Results suggest that the crisis negatively affects the likelihood of both diversifying and crossborder acquisitions, which is consistent with the behavioral theory of the firm. As a response to economic downturns, firms tend to focus on their core business as well as their home market, suggesting they are more reluctant to explore new industrial and geographical markets. We then rely on the diversification literature to link acquisitions to firm performance. We find that diversifying acquisitions have a negative effect on short-term accounting performance in crisis times. Crossborder acquisitions have a positive impact on short-term accounting performance in crisis times, although this impact tends to become weaker (though not significantly) than during non-crisis times. We lastly discuss the implications of these findings for managers and scholars.

The role of non-financial measures in controlling myopic activities: the case of hard selling

Using a principal-agent framework, many analytical studies have examined the role of non-financial or additional performance measures in enhancing long-run efforts such as customer service. However, myopic activities that enhance short-term firm performance at the expense of long-term profitability are prevalent across industries (and perhaps nations). Accordingly, the purpose of this paper is to investigate when and how non-financial measures may be used to control such myopic activities. Specifically, we investigate the interaction between a myopic behaviour known as hard selling and a specific non-financial measure (customer satisfaction), often used to measure the customer irritation that results from hard selling. Prior studies suggest that non-financial measures are always a valuable addition because they increase the level of long-run efforts and decrease the (over) reliance on financial incentives. In contrast, we find that non-financial measures may not always be valuable in controlling myopic activities, and when valuable, they may either increase or decrease the reliance on a financial measure such as accounting earnings. In addition, the impact of non-financial measures on myopic activities varies widely, ranging from no impact at all to complete elimination. Overall, these insights enhance our understanding of the role of non-financial measures in controlling myopic activities, in contrast to enhancing long-run efforts.

Labor market evaluation versus legacy conservation: What factors determine retiring CEOs' decisions about long-term investment?

Do CEOs nearing retirement attempt to boost short-term firm performance or do they care more about what type of legacy they will leave behind? The two opposing predictions about the behavior of CEOs upon retirement suggest that retiring CEOs' decisions about certain long-term investment items may be more complex than suggested in the literature. In search of an answer to this question, we examine the relationship between CEO retirement and the level of firm commitment to corporate social responsibility (CSR). The results show that CEO retirement has a negative effect on firm commitment to CSR. However, we found that the negative effect becomes weaker when CEOs retire at relatively older ages or are retained on the board of directors of their own firms. Our finding suggests that CEOs who face weaker pressure from the labor market for corporate directors may pay more attention to preserving their legacy. Copyright © 2014 John Wiley & Sons, Ltd.

Tipping Point

We explore the potential effects of managers’ greed and altruism on their behaviors and firm outcomes. Greed represents extreme self-interest whereas altruism reflects concern for others. We argue that managerial greed leads to a focus on short-term decisions and short-term firm performance. Alternatively, managerial altruism normally produces a focus on longer term decisions and long-term firm performance. Managerial greed is also more likely to produce wrongdoing, whereas managerial altruism produces greater corporate citizenship behaviors. Managerial greed is likely to lead to turnover for non-performance–related reasons whereas managerial altruism is more likely to produce managerial turnover for performance reasons. Overall, we conclude that measured self-interest keeps managers focused on the firm’s goals and measured altruism helps the firm to build and maintain strong human and social capital. The extremes of either greed or altruism likely will harm firm performance. Thus, balance between managerial self-interest and managerial altruism leads to the greatest success.