UK Firms Research Articles

Brexit and the Equivalence of Regulation and Supervision

After Brexit, the UK will become a third country. In the absence of a transitional agreement, its access to the EU markets will be conditioned on meeting the condition of “equivalence of regulation and supervision” as laid down in many EU regulations. Although in substance the UK regulations will be equivalent, the absence of a formal equivalence Commission decision may constitute a serious obstacle to the UK continuing to offer financial services on the EU markets. The consequences would be quite disruptive. An analysis of the different equivalence provisions reveals however a much more complex situation, indicating on the one hand that UK firms may continue to take part in the EU’s financial markets through subsidiaries, on the other may offer their services to sophisticated investors, while in some cases equivalence will be in the hands not of the Commission but of the market supervisors, allowing for more flexible outcomes.

The impact of regulatory complexity upon self-regulation: Evidence from the adoption and certification of environmental management systems

This article focuses on environmental management systems (EMS) and aims to enhance our understanding of the relationship between environmental state regulation and self-regulation. Unlike previous studies that treat state regulation as uni-dimensional and focus on externally certified forms of environmental self-regulation, this article takes a more nuanced approach. It looks at how direct and indirect state regulation and its stringency influence both non-certified in-house and externally certified adoption of EMS. Methodologically, the study differentiates from previous research by acknowledging the interconnected nature of in-house and external certification decisions, viewing these decisions as sequential. Based on a survey of 2076 UK firms, findings show that effective environmental protection entails collaboration between environmental state regulation and in-house adoption of EMS. Results also reveal that externally certified EMS substitute for state environmental regulation, filling the void that results from weakening state regulation in the context of neoliberalism.

Exploring Gendered Inclusion in Contemporary Organizations – ESRC

The last three decades have seen an unprecedented rise in the number of women in work and the mainstreaming of the equal opportunities agenda. In this context, we are also witnessing a growth of postfeminist rhetoric, suggesting that gender workplace equality has been achieved and that women's progress now depends on individual capabilities, such as confidence levels, because structural barriers have been dismantled. In Sheryl Sandberg's words, women simply need to 'lean in' in order to succeed alongside their male colleagues. Despite this optimism, academic research continues to highlight disadvantage experienced by women in the workplace, such as the gendered pay gap, the glass ceiling, women's concentration in lower-paid industries and low representation at senior levels, comprising only 8.6 per cent of directors in large UK firms in 2015.

Cash flow disaggregation and prediction of cash flow

PurposeThe purpose of this paper is to investigate the incremental information content of estimates of cash flow components in predicting future cash flows.Design/methodology/approachThe authors examine whether the models incorporating components of operating cash flow from income statements and balance sheets using the direct method are associated with smaller prediction errors than the models incorporating core and non-core cash flow.FindingsUsing data from US and UK firms and multiple regression analysis, the authors find that around 60 per cent of a current year’s cash flow will persist into the next period’s cash flows, and that income statement and balance sheet variables persist similarly. The explanatory power and predictive ability of disaggregated cash flow models are superior to that of an aggregated model, and further disaggregating previously applied core and non-core cash flows provides incremental information about income statement and balance sheet items that enhances prediction of future cash flows. Disaggregated models and their components produce lower out-of-sample prediction errors than an aggregated model.Research limitations/implicationsThis study improves our appreciation of the behaviour of cash flow components and confirms the need for detailed cash flow information in accordance with the articulation of financial statements.Practical implicationsThe findings are relevant to investors and analysts in predicting future cash flows and to regulators with respect to disclosure requirements and recommendations.Social implicationsThe findings are also relevant to financial statement users interested in better predicting a firm’s future cash flows and thereby, its firm’s value.Originality/valueThis paper contributes to the existing literature by further disaggregating cash flow items into their underlying items from income statements and balance sheets.

Initial compensation contracts for new executives and financial distress risk: An empirical investigation of UK firms

This paper analyses the effect of financial distress risk on the initial compensation contracts of new executives in the UK, where credit markets are more concentrated than in the US. We find that financial distress risk has a negative and statistically significant impact on the level of cash-based compensation and total compensation of executives, who are newly hired from either outside or inside the firm. This negative impact is accentuated in firms with a high fraction of bank debt, suggesting that banks, as creditors, provide monitoring and influence initial executive compensation packages in firms with high financial distress risk. Additionally, we find that financial distress risk has a negative and significant impact on the fraction of equity-based compensation for both externally and internally appointed executives.

Does executive ownership lead to excess target cash? The case of UK firms

PurposeThe aim of this paper is to investigate the dynamics between executive ownership and excess cash policy in the UK.Design/methodology/approachThe authors identify firms adopting an excess policy using a joint criterion of high cash and cash higher than the target. Logit analysis is used to estimate the impact of executive ownership and other governance characteristics on the probability of adopting an excess cash policy.FindingsThe results suggest that, in the UK, the impact of the executive ownership on the probability of adopting an excess cash policy is non-monotonic, in line with the alignment-entrenchment hypothesis. The results are robust to different definitions of excess cash policy, to alternative specifications of the regression model, to different estimation frameworks and to alternative proxies of ownership concentration.Research limitations/implicationsThe authors’ approach provides a new measure of the excess target cash for the firm. They show the need to identify an excess target cash policy not only by using an empirical criterion and a theoretical target level of cash, but also by capturing persistence in deviation from the target cash level. The authors’ measure of excess target cash calls into questions findings from previous studies. The authors’ approach can be used to explore whether excess cash holdings of UK firms and the impact of managerial ownership have changed from before the crisis to after the crisis.Practical implicationsThe authors’ measure of excess target cash allows identifying in practice levels of cash which are abnormal with respect to an equilibrium level. UK firms should be cautious in using executive ownership as a corporate governance mechanism, as this may generate suboptimal cash holdings and suboptimal firm value. Excess cash policy might be driven not only by a poor corporate governance system, but also by the interplay between agency costs of managerial opportunism and cost of the external finance which further research could explore.Originality/valueActually, “how much cash is too much” is a question that has not been addressed by the literature. The authors address this question. Also, this amount of cash allows the authors to study the extent to which executive ownership contributes to explain the out-of-equilibrium persistency in the cash level.

Institutional investment horizon and dividend policy: An empirical study of UK firms

This paper investigates the effect of the institutional investment horizon on dividend policy. Using a panel dataset of non-financial UK firms over the period 2000‒2010, we measure institutional investors’ investment horizons by the churn rate of their overall stock positions in a firm. We find that there is a significantly negative relationship between the churn rate and dividend payments, and this negative relation is robust to the usage of different dividend policy proxies, substitute methodologies and alternative churn rate measures. Thus, our findings suggest that institutions with shorter term investment horizons (with higher churn rates) have a negative impact on dividends, whereas longer term institutional investors (with lower churn rates) have a positive one. Overall, our evidence is consistent with the notion that long-horizon institutions are more concerned with monitoring, compared to short-horizon institutions, and prefer higher dividends to increase dividend-induced capital market monitoring in order to lower the agency costs of managerial discretion. In addition, this positive influence may also reflect the preferences of tax-neutral long-horizon institutions for dividend income due to their liquidity needs, as well as the common institutional charter and prudent-man rule restrictions.

Export-led innovation: the role of export destinations

This article analyzes the effect of exporting activity on the innovative performances of firms in France, Germany, Italy, Spain, and UK. It argues that the positive effect of exporting on innovation usually found in the literature varies according to the specific destinations of exports, and it identifies two dimensions along which export destinations might differ: the level of foreign technological spillovers available to exporting firms (the technological learning effect) and the type of foreign demand that exporting firms are able to access (the foreign demand effect). The empirical analysis, which takes advantage of firm-level information about the export destinations of exporters, shows that while the technological learning effect increases mainly the incentives to introduce brand new product innovations, the foreign demand effect fosters the adoption of process innovations. (Less)

An Empirical Investigation of Macroeconomic Factors on Firm Performance in the United Kingdom

How firms perform during the business cycle and what macroeconomic factors have the greatest influence on industrial firm performance? The purpose of this study is to study the impact of chosen macroeconomic factors on firm performance in the United Kingdom. To investigate effects of macroeconomic factors, panel data with instrumental variables were used between the period of 2000 and 2014 for top 100 firms in UK. As a result of the analysis, gross domestic product, inflation rate, and the rate of domestic debt interest payments to total income tax have a direct positive impact on firm performance. On the other hand, exchange rate, interest rate and the rate of short term foreign debts to central bank international reserves have an inverse impact.

Corporate carbon reporting: What purpose does it serve business performance and management?

UK firms participate in multiple carbon reporting schemes that not only aim to get them disclosing emissions data but also take action beyond reporting. The paper looks at these schemes and discusses what they mean for business performance and management. To determine the rationales, practices and impacts of carbon reporting on organisational behaviour an extensive desktop review analysed websites and Annual reports of 176 UK firms. This was supplemented by an intensive phase of 36 interviews with individuals representing 19 companies in one of four case-study sectors (e.g., Energy utility, Extractive, Financial service, Water); and 24 interviews with Government officials, regulators, consultants, or nonprofit organisations. Firms report because of win-win outcomes, legitimacy seeking, and/or to be auditability. However, reporting per se does not necessarily lead to organisational changes. Economic, reputational and regulatory factors, as well as sectoral-level characteristics (e.g., energy intensity) determine reporting’s impact. This research has implications for the aims, designs and purposes of imposing reporting requirements to help business and society tackle climate change. It contributes to a growing debate on the social implications of corporate reporting by highlighting the need to better understand what motivates businesses to not only disclose information, but also take action beyond reporting.

How much value is in business model reconfiguration?

A large gap has opened up between expectations about the value of business model reconfiguration (BMR) and the evidence to support these views. To help close this gap, this paper examines the relationship between BMR and the performance of incumbent firms. We investigate this relation using regression analysis and unique survey data from a sample of 198 publicly-traded UK and US knowledge-intensive business service firms. We find that BMR, on average, has no effect on firm performance. However, we estimate an inverted U-shaped relation between the scope of BMR and performance for firms which are also engaged in technological innovation. We also show that, unlike firms in general, high performing firms tend to experience increasing returns to BMR. These findings contribute to the innovation and the emerging business model literatures by highlighting both the costs and the benefits associated with BMR, by developing a new measurement scale for BMR, and by elucidating the contingent nature of the BMR-perform...

Do Managerial Practices Matter in Innovation and Firm Performance Relations? New Evidence from the UK

AbstractThe innovation and firm performance relationship remains a puzzle, as all types of innovation are not equally beneficial. Besides, better‐managed firms can perform better. Integrating these two strands of literature, we examine whether managerial practices explain this relationship using data from UK firms during 1992–2014. We find that firms which focus on R&D activities jointly with better managerial practices benefit favourably. During the post‐crisis period, higher intangibles are only beneficial when combined with R&D activity. Also firms with better managerial practices and innovative activities exhibit a positive effect of higher leverage. Finally, an inverse U‐shaped result supports the Schumpeterian theory of creative destruction.

The Shareholder Wealth Effects of Modern Slavery Reporting Requirements

We examine the shareholder wealth effects of the adoption of the UK Modern Slavery Act (MSA) in 2015. The MSA’s Transparency in Supply Chains clause introduced new reporting requirements mandating certain firms to provide an annual statement outlining their actions to tackle modern slavery in their business and supply chains. An event study of stock price reactions of UK firms covered by the MSA to eight events associated with its adoption provides no evidence of abnormal stock returns. We do, however, uncover significant cross-sectional differences in stock price reactions, with results suggesting that the MSA provides a competitive advantage to firms with a demonstrated track record of addressing slavery risk. By contrast, we do not find evidence of an impact of firms’ pre-regulatory Corporate Social Responsibility disclosure on stock price reactions. Our findings highlight the economic value for companies of maintaining socially responsible sourcing practices, and inform the current policy debate on the importance of greater transparency in corporate supply chains.

Shareholder Wealth Effects of Modern Slavery Regulation

We examine the shareholder wealth effects of the adoption of the UK Modern Slavery Act 2015 (MSA). The MSA’s Transparency in Supply Chains clause introduced new reporting requirements mandating certain firms to provide an annual statement outlining how they identify and mitigate modern slavery in their business and supply chain. An event study of stock price reactions of UK firms covered by the MSA to eight events associated with its adoption provides no evidence of abnormal stock returns. We do, however, uncover significant cross-sectional differences in stock price reactions, with results suggesting that the MSA provides a competitive advantage to firms with a demonstrated track record of addressing slavery risk. We find no effects for preregulatory corporate social responsibility disclosure levels on stock price reactions. Our findings highlight the economic value of maintaining socially responsible sourcing practices and inform the current policy debate on the importance of greater transparency in corporate supply chains.This paper was accepted by Gad Allon, operations management.

Profiting from FDI in conflict zones

This paper examines how firm experience with armed conflict and host country engagement in conflict jointly affect the profitability of foreign subsidiaries. We test our hypotheses using a sample comprising 33,620 observations of foreign subsidiaries of 693 UK firms in 212 countries over the period 1999–2008. We show that (1) firm experience with conflict has a horizontal S-shaped relationship with subsidiary profitability, (2) extrastate conflict in the host country is positively related to subsidiary profitability and (3) the impact of firm experience with conflict is negatively moderated by the level of engagement of the host country in extrastate conflicts.

The monitoring role of female directors over accounting quality

Recent research in accounting suggests female directors exert more stringent monitoring over the financial reporting process than their male counterparts. However, an emerging literature in finance and economics provides mixed findings and questions whether females in leadership roles significantly differ from their male counterparts. Building on this literature, we re-examine the link between the presence of female directors, gender biases, and financial statements quality. Using a large sample of UK firms we find that a larger percentage of women among independent directors is significantly associated with lower earnings management practices. However, we show that this relation disappears if we focus on firms that do not discriminate against women in the access to directorships. Finally, we provide evidence that gender biases are associated with lower earnings quality. We interpret our results as consistent with (1) prior evidence that males and females do not differ substantially when performing the same role in highly specialized positions, and with (2) discrimination being an important factor explaining the association between female directors and accounting quality.

How Do Domestic Regulatory Traditions Shape CSR in Large International US and UK Firms?

AbstractThis article examines corporate social responsibility (CSR) pertaining to labor standards in apparel and tax transparency in extractives and explores how domestic regulatory traditions shape CSR in large international US and UK firms. Reflecting their more collaborative business‐government traditions, British firms are more willing to join international CSR multi‐stakeholder initiatives with business‐critical actors such as unions and civil society actors. The US has a more top‐down regulatory approach, which promotes hard law international CSR or encourages business‐driven voluntary CSR initiatives. This article makes three contributions. First, it argues that while corporations are the key actors in international CSR, their behavior reflects their respective national business systems. Second, focusing on a range of international CSR initiatives, this article finds that UK firms are more interested in adopting international (multi‐stakeholder) CSR initiatives than US firms. Finally, the article shows that the US and the UK governments play a key role in driving an international CSR agenda, and in doing this it highlights government agency more so than other research has.

Corporate efficiency, credit status and investment

ABSTRACTThis paper considers the relationship between financial frictions and investment. In an effort to clarify the role of cash flow in examining the impact of capital market imperfections, endogenous switching regression models are estimated for a panel of 1122 UK firms listed on the London Stock Exchange over the period of 1981–2009. Not only is the financial regime which the firm faces endogenous, we also allow the regime to change over time via modeling efficiency using stochastic frontier analysis. The results reveal that a firm's constrained credit status changes with the improvement of its efficiency. Furthermore, the analysis reveals that financially constrained firm's investment is comparatively more sensitive to its cash flow. Moreover, this sensitivity is statistically significant and is negatively related with corporate efficiency.

Modelling the impact of performance management practices on firm performance: interaction with human resource management practices

The paper draws on resource orchestration theory to investigate whether and how performance management (PM) practices interact with human resource management (HRM) practices in organisations as well as how this interaction affects firm performance. The proposed theoretical model was tested through a survey of 192 UK firms using Partial Least Squares approach for structural equations modelling. The findings show that the effect of PM practices on firm performance is better explained when the interaction between these practices and other organisational practices is considered. In particular, we examine the extent to which the interaction between PM practices and commitment-based HRM practices affects performance. We find that when HRM practices and PM practices are misaligned, their effect on performance can be negative. This is the first paper in the PM literature that establishes the relationship between PM and HRM practices in organisations and demonstrates the effect of this relationship on firm performance.

Brexit and financial services

Financial services constitute an important net export for the UK economy, for which the rest of the EU is the largest market. This paper considers the likely consequences of Brexit for this sector. A ‘soft’ Brexit, whereby the UK leaves the EU but remains in the single market, would be a lower-risk option for the City than other Brexit options, because it would enable financial services firms to continue to rely on regulatory passporting rights. Under a ‘hard’ Brexit scenario, where the UK leaves the single market, the UK might in principle be able to benefit from the EU’s third country ‘equivalence’ frameworks for financial services, but these are cumbrous and incomplete alternatives to passporting. UK firms would find it considerably more costly to export to the EU. This would also be a loss to the EU27, because the UK specialises in capital markets services for which the EU, over-reliant on banking, recognises a need. However, much of this ‘UK’ activity is provided by subsidiaries of US-headquartered groups. In the event of hard Brexit, these firms may be able to compete just as effectively from New York as from London. If ‘soft’ Brexit proves politically impossible, it seems highly desirable that the UK push for a transition period of continued EU membership pending at the very least completion of equivalence determinations and more usefully, the conclusion of a suitable bilateral agreement.