Subsample Of Firms Research Articles

The Power of Culture: Business Nationalist Culture and ESG Performance

High-quality development is the theme of China’s economic and social development in the new era, and corporate ESG performance is a comprehensive indicator for evaluating the level of corporate environmental responsibility, social responsibility and governance, as well as an important yardstick for identifying the high-quality development of enterprises. This paper takes Chinese non-financial listed companies from 2011 to 2022 as the research sample and empirically examines the impact of corporate nationalism culture on corporate ESG performance and its mechanism by quantifying corporate nationalism culture using the text of corporate annual reports, natural language processing and text analysis methods. The results of the study show that corporate nationalism culture significantly enhances corporate ESG performance. The mechanism analysis suggests that corporate nationalism culture, as an internal informal system, can play a governance role and promote corporate ESG practices by changing attention allocation and mitigating agency problems. The positive effect of corporate nationalism culture on corporate ESG performance is more pronounced in the grouping of firms with lower institutional investor shareholding, fewer analysts’ attention and embedded party organisations. A heterogeneity analysis reveals that the corporate nationalism culture driving effect on corporate ESG performance is more significant in the subsample of firms with weak financing constraints, in the growth period and in the decline period. This study reveals the positive role of soft cultural factors in enhancing corporate ESG performance, providing useful managerial evidence for companies to integrate ESG concepts at the strategic level for high-quality economic development.

Acquisitions and social capital

AbstractWe examine the association between the social capital—social norms that encourage altruism and discourage opportunism—in the state of the firm's headquarters and the acquisitions it makes. We find that the cumulative abnormal return around an acquisition announcement is high when an acquirer is headquartered in a high social capital state in the United States. This effect is robust and incremental to the effect of a firm's corporate social responsibility (CSR) ratings and economically comparable to the effect of corporate governance. The effect of social capital is stronger for firms that have lower CSR ratings, which indicates social capital may act as a substitute for CSR. An additional analysis shows that social capital's effect is stronger in a subsample of firms with weak corporate governance. Acquirers from states with high social capital also demonstrate less hubris in acquiring targets than those from states with low social capital as the evidence of lower bid premiums indicates. Overall, our results show that the social norms that social capital measures mitigate potential agency problems in acquisitions by inducing managers to honor their obligations to shareholders.

Risk-taking incentives and risk-talking outcomes

CEOs’ option-based compensation and discussions about political risk (risk-talking) in successive earnings conference calls are significantly positively associated. This effect is more significant in the subsample of firms with less equity price volatility and poor investment risk-taking (lower capital expenditure). Furthermore, seven out of eight components of risk-talking are positively related to CEOs’ option-based compensation. These findings suggest that CEOs with more options in compensation packages are likely to find discussing political risk during corporate earnings calls as a viable alternative to boost proxies of risk-taking outcomes (such as equity price volatility), especially when they perceive risk-taking expectations to be untenable.

CEO overconfidence, risk-taking, and firm value: Influence of incentive compensation and financial constraints

By using the data of firms listed on the three major US stock exchanges—the New York Stock Exchange, Nasdaq Stock Exchange, and American Stock Exchange—this study investigated (1) whether CEO overconfidence increases additional risk-taking and affects firm value, (2) whether high incentive compensation for overconfident CEOs increases additional risk-taking behavior and firm value, and (3) whether financial constraints reduce overconfident CEOs’ additional risk-taking and firm value. Our empirical results reveal significant differences in the variable data between the subsamples of firms with an overconfident CEO versus and those with a non-overconfident CEO. The firms with an overconfident CEO had more additional risk-taking, higher firm value, and more financial constraints than those with a non-overconfident CEO did. CEO overconfidence had significant positive associations with additional risk-taking and firm value, indicating that CEO overconfidence has a positive effect on firm overinvestment. Although overconfidence sometimes distorts investment decisions, it also leads to risky but valuable investments. Offering incentive compensation can incentivize CEOs to engage in additional risk-taking behaviors that increase firm value. This result indicates that offering a greater amount of incentive compensation encourages CEOs to take additional risks because they can gain higher compensation from making valuable investments that increase their firm’s value. In this study, incentive compensation was more likely to motivate risk-taking leading to increase firm value in non-overconfident CEOs than in overconfident CEOs. That is, granting non-overconfident CEOs a high percentage of incentive compensation can align their interests with those of shareholders and encourage more rational risk-taking. Compared with firms with overconfident CEOs, those with non-overconfident CEOs that were subject to higher financial constraints exhibited a less significant decrease in additional risk-taking but a more significant decrease in firm value.

The timeliness of 10‐K filings, financial performance, and stock returns

AbstractUsing a dataset constructed from the EDGAR database, this study investigates whether the timing of filing 10‐Ks contains useful information to investors. We argue and find that firms with better earnings news are more likely to file their 10‐Ks early. We further show that firms experience earnings increase would accelerate the filing of their 10‐Ks. We explore whether the timeliness measure is useful for predicting future financial performance and stock returns. We find that firms filing 10‐Ks early in the current year are more likely to have better earnings and higher stock returns in future years. Our results are robust to different measures of timeliness, before and after the statutory filing deadline changes, and subsamples of firms with large or small market capitalization.

International takeover laws and corporate cash holdings

AbstractWe examine the impact on corporate cash holdings of international merger and acquisition (M&A) laws, which facilitate corporate takeovers. We use the staggered enactment of M&A laws from 1992 to 2005 and a sample spanning 34 jurisdictions, and find that levels of corporate cash holdings increase after passage of M&A laws. We also find that firms with better operating performance, higher earnings volatility, higher P/E ratio, and in jurisdictions with high M&A intensity hoard more cash after the enactment of M&A laws. These firms decrease dividends and capital expenditure and increase cash‐based acquisitions in the post‐M&A law period. Additional analysis shows that the effect is manifested in the subsample of firms in jurisdictions with better institutional environments. Lastly, we find that investor valuations of cash holdings decrease after the enactment of M&A laws. Collectively, our results suggest that managers hoard cash to finance M&A activities after the enactment of M&A laws, driven by the motive of empire‐building, and that cash hoarding behaviors are viewed by investors as value‐decreasing.

Managerial Duties and Managerial Biases

Much of the evidence on managerial biases in corporate finance focuses on the CEO and, in particular, CEO overconfidence. This singular focus can lead to misattribution as it ignores the roles of other managers who are responsible for a given corporate outcome. We evaluate the influence of the CFO and other C-suite executives as compared with the CEO. Mirroring the widely used Longholder CEO measure of CEO overconfidence, we construct Longholder CFO and Longholder Other measures. For financing decisions, we find that CEO overconfidence becomes an insignificant predictor of most decisions when included jointly with the CFO proxy, whereas CFO overconfidence has strong predictive power. The reverse holds for nonfinancing decisions: CEO beliefs predict the risk and return of investment projects and, thus, their cost of financing as well as acquisitions. Other C-suite managers’ overconfidence is not significant in either of these two realms. CEO overconfidence does remain significant even for financing decisions in the subsample of firms with “powerful” (entrenched) CEOs. We also show that overconfident CEOs tend to hire overconfident CFOs, which generates a multiplier effect and explains the misattribution to the CEO in analyses that do not account for the roles of other managers. Our results imply that analyses of managerial biases need to identify the dominant decision makers and account for their respective influence. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2022.4467 .

Earnings-based borrowing constraints & corporate investments in 2007–2009 financial crisis

Recent work on the debt composition of non-financial firms finds that most of the large firms’ debt is cash flow-based with earnings-based borrowing constraints (EBCs), limiting the maximum debt relative to firms’ EBITDA. During the 2007–2009 crisis, EBCs tightened in the leveraged loan market. Consistent with the reduction in the supply of credit, I find that investments and debt issues of firms with binding EBCs reduce significantly compared to control firms. Furthermore, firms with binding EBCs cut their share repurchases and total payout during the crisis. In the cross-section, the reduction in investments and total payout is larger in the subsample of firms whose marginal borrowings are more likely to come from cash flow-based debt.

Sustainable Governance and Green Innovation: A Perspective from Gender Diversity in China’s Listed Companies

Sustainable governance has become essential in corporate sustainable development. As female executives bring diversity to corporate governance, their impact on the corporate sustainability has attracted wide attention. Using the evidence from China’s listed companies in Shanghai and Shenzhen A-shares between 2010 and 2019, this paper examines the impact of gender diversity of executives on corporate green innovation. We find that the proportion of female executives has a significant negative impact on corporate green innovation. The results show: (1) Considering the heterogeneity of corporate risks, the negative impact of female executives on green innovation exists when the company is exposed to high risks, that is, in the subsample of firms with high risk-taking level and financial constraints; (2) considering the heterogeneity of corporate characteristics, female executives have a negative impact on green innovation in small non-state-owned companies with high separation of ownership and control; (3) considering the heterogeneity of industries, the effect of female executives on green innovation is significant in non-heavy pollution industries; (4) the mechanism test shows that patriarchy culture weakens the influence of female executives. In an environment where men are in power, the impact of female executives on green innovation is not significant; (5) taking the 2018 environmental fee-to-tax policy as a quasi-experiment, we find that female executives will instead promote corporate green innovation in areas where the environmental tax burden has increased significantly. The results imply that since corporate green innovation is a high-risk investment, female executives will make green innovation decisions more prudently based on corporate operating characteristics. This research provides a new perspective for understanding the role of female executives in corporate governance and corporate sustainable development.

On the role of institutional factors in shaping working capital management policies: Empirical evidence from European listed firms

The study examines the impact of institutional factors on working capital management for a sample of 5431 European listed firms over the period 2010–2018. Employing a weighted least squares (WLS) methodology, we provide empirical evidence on the role of institutional quality in shaping the working capital policies of European listed firms. The results indicate that firms located in countries with a stronger institutional framework maintain lower levels of working capital on average. The results are robust to different subsamples of firms. The study complements the extant literature by analyzing the effects of institutional quality on working capital management, across a large number of different institutional systems specific to developed and transition economies alike. The results are useful for practitioners and policy makers in understanding the relationship between institutional quality and short-term firm-level decisions.

Confucian culture and executive compensation: Evidence from China

AbstractResearch Question/IssueThis study investigates how traditional Confucian culture affects executive compensation from three dimensions: CEO compensation level, CEO pay gap (the pay gap between CEO and other management members), and the gender pay gap.Research Findings/InsightsWe find that firms' exposure to stronger Confucianism is associated with less CEO compensation, a smaller CEO pay gap, and a larger gender pay gap in China. These findings are consistent with the core values of moderatism, collectivism, and patriarchalism rooted in the Confucian culture. Our findings are robust to different firms' exposure to Confucian culture measures. Endogeneity concerns are further addressed with a subsample of firms that experienced headquarters relocation. Cross‐sectional analyses show that the influence of traditional Confucian culture is more pronounced for firms facing less industry competition, owned by the state, or with a higher concentration of power. Additional analyses show that the Confucian culture also reduces the CEO's pay‐for‐performance sensitivity, weakens pay incentives, and leads to lower firm risk‐taking; however, it also mitigates firm agency problems by reducing firm earnings management and managerial perk consumption. The combination of these positive and negative effects reduces the firm's overall value.Theoretical/Academic ImplicationsThis study expands our understanding of the role of informal institutions in corporate behavior. Corporate governance is embedded in the market's formal institutions, which, in turn, are embedded in local informal institutions. Academically, our study suggests further corporate governance research on informal institutions, especially in emerging markets where institutional development is not yet complete and informal institutions play a particularly important role.Practitioner/Policy ImplicationsThis study could help practitioners better understand the business culture and compensation contract design in Confucian nations. It also suggests that policymakers consider the effect of informal institutions when designing formal institutions.

The effect of government industrial policies on corporate accounting conservatism

This study examines whether and how firms adjust their accounting conservatism in response to government support through industrial policies, which reduce firms’ dependence on external financing from the capital market. Based on China’s unique economic programme called ‘Five-Year Plan’ from 1991 to 2015, we observe a decline in accounting conservatism among firms covered by government industrial policies. The decline is more pronounced in covered firms, which face higher ex-ante financial constraints, and in the subsample of firms which receive higher government support. These findings are robust to alternative specifications of accounting conservatism and policy timing. Our evidence implies that government industrial policies can have unintended consequences for corporate financial reporting.

이사의 손해배상책임 감경규정 도입의 효과

This paper investigates the effect of adoption of the Liability Limitation Provisions(LLP) on managerial behavior and future firm performance, and studies what role the corporate governance plays in this context. Our findings are summarized as follows. First, we document that LLP adopters spend more R&D expenditures, have higher idiosyncratic risk, and have greater volatility in operating performance than non-LLP adopters. Second, there is no significant difference in firm performance between LLP adopters and non-LLP adopters. This implies although LLP adoption lets managers take more risk, it does not immediately lead to better performance due to certain offsetting factors. Third, however, when an analysis is conducted on subsamples divided based on the effectiveness of corporate governance, we find that LLP adopters exhibit better operating performance than non-LLP adopters in a subsample of firms with good governance. This suggests the better the governance structure, the more effectively the negative effects of LLP are suppressed and the better the positive effects of LLP are manifested. Overall, this study shows that LLP adoption can promote bold managerial behavior, and lead to better firm performance, especially in firms with good governance. The findings of this study provide empirical support to justify the LLP in Korea.

The impact of exporting on women's employment

PurposeThis paper aims to examine the effect of exports on women's employment rate for Turkish manufacturing firms over a recent period of 2003–2015.Design/methodology/approachThe authors establish treatment models and use propensity score matching (PSM) techniques together with difference-in-difference methodology.FindingsThe results of the study indicate that starting to export increases women’s employment rate for manufacturing firms. Gains in female employment rates are observed for the firms operating in low and medium low technology intensive sectors, low-wage sectors as well as laborlabor-intensive goods exporting sectors.Originality/valueThe authors complement previous literature by utilizing a rich harmonized firm-level dataset that covers a large number of firms and a recent time period. The authors distinguish between several sub-samples of firms according to technology intensity of the sector in which they operate, wage level and factor intensity of exports and investigate whether or not women gain from trade in terms of employment opportunities.

CEO gender and corporate labor cost

AbstractWe examine the impact of CEO gender on firm‐level average labor cost. In a sample of U.S. public firms with voluntary labor cost disclosure, we find that firms with female CEOs have significantly lower average labor cost than firms with male CEOs. This effect is robust to the use of propensity score matching approach to alleviate the impact of possible selection bias and endogeneity concerns. The results are stronger in a subsample of firms where CEO turnover introduces CEO gender change. We hypothesize that female CEOs may be more risk averse and tend to pursue less risky corporate policies, leading to a lower equilibrium employee wage. Alternatively, female CEOs may offer higher non‐monetary employee benefits in lieu of monetary compensation. Our empirical results do not support the risk aversion hypothesis, whereas we find robust evidence that firms with female CEOs offer higher non‐monetary employee benefits than firms with male CEOs, especially in human capital‐intensive firms.

Borrowing from government owned banks & firm's liquidation risk

Government Owned Banks (GOBs) have other explicit or implicit objectives apart from profit maximization. In this paper, I study whether this affects the liquidation risk of firms borrowing from GOBs. Using the natural experiment of securitization reform in India that increased firms' liquidation risk, I find that the firms borrowing exclusively from GOBs did less reduction in secured debt usage compared to other firms. In the cross-section, the effect is more substantial in the subsample of firms that are more likely to face financial distress. These results suggest that borrowing from GOBs have less liquidation risk.

The Effect of Borrowing From Government Owned Banks on Perceived Distress Risk

Government Owned Banks (GOBs) have other explicit or implicit objectives apart from profit maximization. In this paper, I study whether this affects the liquidation risk of firms borrowing from GOBs. Using the natural experiment of securitization reform in India that increased firms' liquidation risk, I find that the firms borrowing exclusively from GOBs did less reduction in secured debt usage compared to other firms. In the cross-section, the effect is more substantial in the subsample of firms that are more likely to face financial distress. These results suggest that borrowing from GOBs have less liquidation risk.

An examination of the influence of mutual CFO/audit firm tenure on audit quality

This study examines whether the extent of professional relationships between an audit firm and their client’s CFO influences audit quality. If regulators’ concerns that the relationship that develops over time between an audit firm and their client’s CFO impairs auditor judgment are justified, then we should observe a negative relationship between the length of audit firm’s tenure with their client’s CFO and audit quality. The results suggest that mutual audit firm-CFO tenure is associated with lower audit quality measured by the magnitude of discretionary accruals, the reduced incidence of issuance of going-concern audit opinions for distressed companies, and an increased likelihood of the receipt of an Accounting and Auditing Enforcement Release (AAER) from the US. Securities and Exchange Commission (SEC). These affects are concentrated in a subsample of firms with higher levels of corporate governance concerns. These findings have implications for policies related to audit firm rotation. Specifically, the results suggest that regulators need to consider other relationships underlying audit firm tenure, such as the relationships that form between audit firm and client personnel, when evaluating audit firm rotation policies.

Do Environmental Regulations Do More Harm Than Good? Evidence from Competition and Innovation

This study examines whether and how competition affects corporate strategic responses to stringent environmental policies. Using the nonattainment status of U.S. counties as a source of exogenous variation in environmental regulation, we find that competition fosters green innovation as firms respond to stricter regulatory policy. Additional analyses using a subsample of firms in counties whose pollutant concentrations are marginally above or below EPA standards for regional air quality and exploiting exogenous variations in product market competition further reinforce our baseline evidence. The results suggest that the cost of relocation is a critical mechanism that compels firms to innovate when responding to tightened environmental policies and heightened competitive pressure. Regulation-induced green innovation helps competitive firms better achieve product differentiation and attract more corporate customers than their less competitive peers. Finally, competitive firms' strategic responses to stringent environmental regulations result in improved market share growth, markup, profit margin, and abnormal return.

Stock Market Response to Multiple Alliance Announcements

We document frequency distribution of 4315 two-party, non-equity alliances undertaken by the U.S. based firms between 1986 and 2015 in 11industries and find that on an aggregate basis, the firms which form multiple alliances based on the exploitation motive are as likely to enter into alliance as the firms that enter into multiple alliances based on the exploration motive. However, we find strong evidence that the firms that enter into alliances on three or more occasions are driven by the exploration motive while, the firms that enter into alliances one and one or two times are driven by the exploitation motive. The average cumulative abnormal returns (ACAR) for all of the three subsamples of firms that undertook one, one or two, and three or more alliances during the time period for this study are all positive but exhibit a declining trend. Firms that are larger in terms of total assets engage more frequently in alliances than smaller firms. Returns to firms that enter into three or more alliances are sensitive to the leverage employed and the likelihood of bankruptcy whereas returns to firms that enter into only one or one or two alliances are affected significantly by the considerations of competitive forces.