UK Firms Research Articles

Cross-border acquisitions and financial failure of UK firms (2008-2013)

This study examines the financial failure of UK cross-border acquirers between 2008 and 2013. The researcher investigates acquirers' financial failure using two financial models. Based on a sample of manufacturing and non-manufacturing firms, the research explores the financial health of acquirers over three years starting from the date they announce the deals. The main findings confirm that most of firms suffer from financial instability after announcing their cross-border deals and that according to both models. These findings are consistent with those of other studies; which also demonstrate difficulties experienced when undertaking cross-border deals, and that due to differences in law, rules and cultures between the host and the home countries.

External audit quality and firms’ credit score

Using a sample of UK firms, we investigate whether external audit quality has an informational role for firms credit score. In our general research setting, we could not find any evidence on the as...

What is Driving the Decline in Contributions of Multinational Firms to Corporate Tax Revenues?

This paper explores reasons for declining contributions of multinational firms to corporate tax revenues. Using a population of UK firms, I show that over the period 2000 - 2014 multinationals paid a declining fraction of corporate tax revenues, while expanding in size. In 2014 over 70% of total assets reported on UK company balance sheets were held by companies that paid no tax and were part of a multinational group. Further, tax incentives for small and medium companies have increased the number and the corporate tax revenues from those companies. I analyze potential reasons for why these patterns occurred.

25 Years Ago

MACH-METCUT cycle ends; MACH shortens; economy on the up for UK firms; JIMTOF & IMTS developments have 21st century feel – multi-process machines & new mechanical designs; CNCs increasingly fronted by Windows

The UK's Great Demand and Supply Recession

We revisit UK's poor productivity performance since the Great Recession by means of both a suitable theoretical framework and firm-level prices and quantities data for detailed products allowing us to both measure demand, and its changes over time, and distinguish between quantity total factor productivity (TFP-Q), i.e., the capacity to turn inputs into more physical output (number of shirts, liters of beer), and what we call revenue total factor productivity (TFP-R), i.e., productivity calculated using revenue (or value-added) as a measure of output and so the capacity to turn inputs into more revenue. This in turn allows us to measure how changes in TFP-Q, demand and markups ultimately affected revenue TFP, as well as labour productivity, over the Great Recession. Our findings suggest that the poor UK firms' productivity performance post-recession is due to both a weakening of demand and a decreasing TFP-Q pushing down sales, markups, revenue TFP and labour productivity.

Cross-border acquisitions and financial failure of UK firms (2008-2013)

Cross-border acquisitions and financial failure of UK firms (2008-2013)

Smoothed or not smoothed: The impact of the 2008 global financial crisis on dividend stability in the UK

This study examines the cash dividend behaviour of a panel dataset of 1,178 firms traded in the London Stock Exchange (LSE) for the period 2008–2017. Using a modified version of Lintner's (1956) partial adjustment model, it attempts to ascertain whether they follow a stable dividend policy and how the 2008 global financial crisis affects the dividend stability in the UK. The results in general show that LSE firms have long-term payout ratios and slowly adjust their cash dividends to their target as suggested by Lintner. The study findings also detect a negative impact of the financial crisis on dividend payments and a tendency to adjust dividends immediately in response to earnings changes in the first five-year period 2008–2012. More specifically, despite the credit crunch and volatile earnings, UK firms set high payout rates but adopt stable dividend policies with a serious degree of dividend smoothing in early years. When UK-listed firms have a better chance to recover from the initial impact of the crisis, they however set even higher payout rates but distribute much more smoothed cash dividends (exhibiting more stability) over the second five-year period 2013–2017.

Globalization of Anglo-American Common Law vs. Strong Nation State: Evidence From the Use of Legal Counsel in Cross-Border Business Transactions Involving China

Along with the globalization of markets and cross-border business activities of multinational corporations, large US and UK firms have played an important role in exporting Anglo-American common law internationally. In this vein, an important but under researched issue is the confluence and interaction of the state power with the diffusion of law via legal professional service firms. Using a sample of 1393 cross-border transactions into and out from China dated between 2010 and 2018, this article empirically sheds light on this issue from the perspective of legal counsel choices in these transactions. It is found that in general, Anglo-American law firms take up an unmatched leading position in the international corporate transactions market; while Chinese law firms only represent a small fraction of all the legal counsel hired in the transactions. In particular, Chinese SOEs do not exhibit a very different pattern in choosing their legal counsel. The percentages of them engaging Anglo-American law firms are actually greater than those of Chinese clients as a whole. If the retaining and dealing with legal counsel is seen as the very first gateway to the entry of a foreign county, then the SOEs need to encounter and compete with the bargaining power of the counterparties when trying to pass it. In such light, host countries may not need to be over alarmed about the investments by Chinese SOEs and the potential cross-border transcendence of state power, which so far do not constitute a counter force to the globalization of Anglo-American common law.

Job Composition and Its Effect on UK Firms in the Digital Era

This paper studies how the adoption of digital technologies has changed the employment structure of UK firms. While the scientific literature traditionally has shown inconclusive results about who is winning the race between man and machine, we argue that currently there are reasons to be less pessimistic about the effect of technology on labor. Drawing on an employer-employee panel survey in 2004 and 2011 in the UK, this study shows that the effect of the firms’ routine exposure on employment and wages varies according to the skill content of occupations and by sectors. Our results suggest that firms’ concentration on routine cognitive jobs does not generate outright job-losses and could even have a positive effect on overall employment at firm-level. On the other hand, firms exposed to routine manual task jobs are more at risk of generating a negative impact on firms’ labor, mainly decreasing their workforce. While the concentration of routine occupations has a job-creating effect in the tertiary sector, this does not necessarily imply consistent job-losses within the secondary sector. Finally, we conclude that the investment in routine workforce without the appropriate technological adoption is not enough to generate positive effects on labor at firm-level, specifically in the manufacturing sector.

Skills combinations and firm performance

Creative skills, STEM (science, technology, engineering and mathematics) skills and management skills have all been positively associated with firm performance as well as regional growth. But do firms that combine these types of skills in their workforce grow more quickly than those that do not? We compare the impact of STEM, creative and management skills on their own, and in various combinations, on turnover growth. We use a longitudinal dataset of UK firms over the period 2008–2014 with lagged turnover data to explore whether the combination of skills used by a firm impacts its future turnover growth. Using fixed-effect panel and pooled OLS models, we find that the performance benefits associated with both STEM and creative skills materialize when they are combined with each other or with management skills rather than when they are deployed on their own.

The Impact of Brexit on UK Firms

We use a major new survey of UK firms, the Decision Maker Panel, to assess the impact of the June 2016 Brexit referendum. We identify three key results. First, the UK’s decision to leave the EU has generated a large, broad and long-lasting increase in uncertainty. Second, anticipation of Brexit is estimated to have gradually reduced investment by about 11% over the three years following the June 2016 vote. This fall in investment took longer to occur than predicted at the time of the referendum, suggesting that the size and persistence of this uncertainty may have delayed firms’ response to the Brexit vote. Finally, the Brexit process is estimated to have reduced UK productivity by between 2% and 5% over the three years after the referendum. Much of this drop is from negative within-firm effects, in part because firms are committing several hours per week of top-management time to Brexit planning. We also find evidence for smaller negative between-firm effects as more productive, internationally exposed, firms have been more negatively impacted than less productive domestic firms. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

The mediating role of corporate social responsibility on the relationship between governance and tax avoidance: UK common law versus French civil law

PurposeThe purpose of this paper is to investigate the direct and indirect links between corporate governance and tax avoidance using corporate social responsibility (CSR).Design/methodology/approachThis study is based on a sample consisting of 300 UK and 200 French firms over the period 2005-2017. This study is motivated by structural equations and system models that specify both a direct link and an indirect link between corporate governance and tax avoidance.FindingsThe results show that CSR fully mediates the relationship between corporate governance and tax avoidance in UK firms. In addition, in French firms, CSR partially mediates the relation between corporate governance and tax avoidance.Practical implicationsThe findings may be of interest to the academic researchers, practitioners and regulators who are interested in discovering corporate governance score, tax avoidance and CSR. Regulators must evaluate their actual corporate governance mechanisms and their country’s legal system before mandating additional governance mechanisms for firms in their country.Social implicationsThis study proved empirically that firms with a higher level of social responsibility are better positioned to obtain more transparency through reducing tax avoidance.Originality/valueThis paper extends the existing literature by examining the mediation effect of CSR on the relationship between tax avoidance and corporate governance.

UK Accelerated Depreciation Policy in an International Context

In this paper we examine two aspects of the temporary increase in the UK Annual Investment Allowance (“AIA”) maximum, allowance, raised from £200,000 to £1m for the calendar years 2019 and 2020 by UK Finance Act 2019 section 32 and Schedule 13. First we scrutinize the technical operation of the legislation as it affects taxpayers with accounting years that do not correspond exactly with the commencement or termination of the increase. We conclude that there is a potential timing trap for businesses whose accounting period begins during the temporary increase but extends beyond the termination on 31 December 2020. This pitfall can dramatically diminish the available allowance from the headline figure depending on the precise timing of the qualifying expenditure. Secondly, we look at the impact of the temporary increase on the cost of capital for a multinational company when there is the opportunity for profit shifting, comparing this to a UK firm with no such possibility. We show that increased AIA will bring down the cost of capital for UK firms that cannot profit shift to a level similar to that for firms that do migrate profits abroad. In contrast, we find that not only is the cost of capital already lower for firms with opportunities for profit shifting, but also AIA is likely to be less effective in reducing their cost of capital. This in turn suggests that the AIA will not be so successful in stimulating investment by firms that engage in profit shifting. At the same time, the more generous allowance is associated with a narrow tax base for all taxpayers, which would reduce revenue to the UK Exchequer without the intended investment stimulus for many UK firms.

Who Responds Creatively to Role Conflict? Evidence for a Curvilinear Relationship Mediated by Cognitive Adjustment at Work and Moderated by Mindfulness

This study aims to clarify to what extent, how and under what conditions role conflict is positively related to employee creativity. Drawing on activation theory and conservation of resources theory, we hypothesized an inverted U-shaped relationship between role conflict and creativity in which the relationship is stronger and positive at intermediate levels of role conflict. Additionally, we predicted that this curvilinear path would be mediated by cognitive adjustment at work and moderated by mindfulness. To test our hypotheses, we conducted two independent studies—a cross-sectional study with 123 employees from an Italian firm and a time-lagged research with 320 employees from various UK firms. Consistent with our predictions, polynomial regression analysis results provided evidence for an inverted U-shaped relationship between role conflict and creativity and for the mediating role of cognitive adjustment at work. Moreover, when mindfulness was high (versus low), intermediate levels of role conflict were associated with increased cognitive adjustment at work and creativity. Our findings enhance current understanding of the conditions under which different levels of role conflict boost or impair creativity at work and offer new insights into how employee can maintain an optimal level of creativity despite conflicting role demands. This is the first study to document a non-linear and indirect relationship between role conflict and employee creativity, as well as to identify mindfulness as a boundary condition shaping the creativity-enhancing effects of role conflict.

Deep Uncertainty Effects on Managerial Perceptions: The Case of UK Firms in the Context of Brexit

Deficiency in information around Brexit has produced tremendous uncertainty. Our study employs perceived environmental uncertainty (PEU) composite-view and directional (state to effect to response) theoretical lens to investigate, through interviews, the impact of information on UK-based senior managers (SMs) and middle-managers (MMs) in understanding and responding to Brexit. Findings reveal the presence of ‘deep uncertainty’ characterized by information deficiency, which reduces the ability to agree on the condition, factors and responses to Brexit and results in pervasive sensemaking. Our findings reveal the suspension of the composite- view and directional flow of PEU. We highlight the implications for strategic decision-making under deep uncertainty: the predominance of sensemaking; strategies need to be agile, responsive and flexible; and SMs/MMs differences in a context of deep uncertainty require trustworthy and deliberate SMs sensemaking and sensegiving to MMs.

Section 7 and Schedule 1: Temporary Increase in Annual Investment Allowance

This paper examines the ten-fold temporary increase in the UK Annual Investment Allowance (“AIA”) maximum allowance, raised from £25,000 to £250,000 for the calendar years 2013 and 2014 by UK Finance Act 2013 section 7 and Schedule 1. The allowance provides accelerated depreciation for UK firms in the form of 100% expensing. We carry out a technical analysis of the UK statutory provisions for businesses having accounting periods which overlap the beginning or end of the temporary increase, finding them to be made complicated by a series of capped apportionments. Then, using data from UK HMRC CT600 returns we go on look at which businesses benefit and to calculate the incentive effect in terms of user cost of capital, determining that the increase affords a very significant step reduction of about 30%. Finally we investigate the additional cash flow benefit that the increase might bring a company, finding it to be limited.

Do bank liquidity shocks hamper firms’ innovation?

This paper highlights the importance of bank-based finance for the innovation activity of UK firms. It identifies both theoretically and empirically how bank shocks affect firms’ innovation. We develop a theoretical model, and test its predictions using a new matched bank-firm-patent dataset for the UK. We find that bank distress during the 2008 and 2011 crises negatively affected firms’ innovation behavior. After carefully controlling for several potential biases in estimation we find that firms whose relationship banks were distressed not only patented less, but those patents were of lower technological value, less original and of lower quality. The negative effect is significantly larger in the case of small and medium size enterprises (SMEs). We also find that banks’ specialization in financing innovation mitigates the impact of bank distress on innovation.

Determinants of Capital Structure: Evidence from the UK

This study investigates the determinants of capital structure of UK firms by using the ordinary least squares (OLS) estimation with six independent variables including company size, profitability, tangibility, growth opportunities, tax, and volatility, as well as four industry classification dummy variables and with financial leverage as the dependent variable. The data set for the research includes all FTSE 100 companies in 2016. The findings reveal (i) a positive but insignificant relationship between company size and leverage; (ii) a negative but insignificant association between profitability and leverage; (iii) level of tangible assets and leverage are negatively related but such negative relationship is not significant; (iv) growth opportunities and leverage are negatively correlated and the negative relationship is highly statistically significant; (v) tax and leverage are positively related but the relationship is not statistically significant; and (vi) volatility and leverage are negatively related but the relationship is not statistically significant. The significant negative relationship between industry dummies and leverage is related to companies in the mining industry that did not use much debt to finance their business compared to those in other industries. Among five different capital structures, the pecking order theory indicates that companies prefer employing internal fund such as retained earnings or excess liquid assets to external finance investment opportunities, which seems to be suitable for UK companies. Static trade off theory which addresses the existence of optimal capital structures of firms affected by the trade-off between costs and benefits when using debt and equity is only applicable in particular cases in the UK. Dynamic trade off theory that argues that the appropriate financing choice typically relies on the financing margin that is estimated in the coming period, and market timing theory which demonstrates that stock price fluctuations in the market influence companies’ capital structure, are not supported by the findings of this study.

IFRS adoption by UK unlisted firms: subsidiary- versus group-level incentives

ABSTRACT We examine both subsidiary- and group-level determinants of IFRS adoption by unlisted UK firms. Many unlisted firms are part of large conglomerate groups. For these firms, decisions about reporting practices are expected to be made at the group-level. Consistent with this hypothesis, we find that subsidiaries adopt IFRS as part of their group’s strategy to improve within group monitoring and raise external debt capital. The probability of a subsidiary adopting IFRS increases further when the parent firm is applying IFRS itself, when the within group information asymmetry is greater, and when the subsidiary is less autonomous. ROC curve analysis indicates that these incentives are more important than traditional subsidiary-level incentives studied previously. In additional analyses, we find that adopting subsidiaries benefit from better accounting quality and higher investment efficiency.

Developing the narrative risk disclosure measurement

This study adopts the pre-modern view of risk as losses only and proposes a new definition of corporate risk disclosure. The new definition is used to formulate new risk-related keywords to develop the process of measuring the risk disclosure score. The theoretical part of this study reviews the different methods of measuring narrative disclosure in literature, discusses five arguments on why risk should be defined as losses only, and proposes a new definition of risk disclosure. The empirical part conducts two tests on a sample of 150 annual reports of UK firms during 2005–2015, formulates new keywords lists, measures RD score from different perspectives, and run correlation and regression analyses for 328 non-financial FTSE All-Share listed firms during 2005–2016, the effect of RD was examined on cost of debt and market firm value one year ahead. The first empirical test shows that about 94% of risk information in annual reports is talking about risk from a negative perspective and negative outcomes only. The second test shows that 87% of the risk-related sentences in the annual reports discussing risks using negative keywords. The descriptive statistics show that the risk disclosure level is increasing across years during 2005–2015 and the utilities industry reports the highest level. The study concludes that the pre-modern view of risk should be adopted. This study contributes to the ongoing debate on the risk definition and whether the positive outcomes of events should be included in the risk disclosure definition. Moreover, the study proposes a new definition of risk disclosure and provides theoretical and empirical evidence on why the pre-modern view of risk should be adopted. Moreover, new risk-related keywords are used for the first time in the risk disclosure literature.