Underperformance Of Firms Research Articles

The Cyber Risk Premium

Cyber risk is an important emerging source of risk in the economy. To estimate its impact on the asset market, we use machine learning techniques to develop a firm-level measure of cyber risk. The measure aggregates information from a rich set of firm characteristics and shows superior ability to forecast future cyberattacks on individual firms. We find that firms with higher cyber risk earn higher average stock returns. When these firms underperform, cybersecurity experts tend to have higher concerns about cyber risk, and cybersecurity exchange-traded funds outperform. Further tests strengthen the identification of the cyber risk premium. This paper was accepted by William Cong, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.02056 .

Long Run Performance of Rights Issues and FPOs: Evidence from India

In this article, we study the long run equity performance of Indian firms which issued Seasoned Equity Offering (SEO) during the period January 2010–December 2022. With a sample of 177 such SEO issuing firms, we show that the long run equity performance of these SEO issuing Indian firms have been significantly inferior compared to firms from the same industry which are similar w.r.t other parameters like size, age and price-book ratio. Investing in an SEO at the close of the first trading day and holding it for 5 years, on an average, gave 17% (3% on an annualised basis) fewer returns than comparable firms. This pattern is more or less independent of the market conditions (bull or bear) except for a brief period during the global financial crisis. The study’s findings suggest that Indian firms that issue SEOs may be underperforming their industry peers over the long term. This could be due to a number of factors, such as the companies raising capital for dilutive purposes, using the proceeds to invest in underperforming projects, or facing challenges in integrating new equity into their existing business operations. Additionally, the study’s findings highlight the importance of careful consideration of long-term performance when evaluating investment opportunities in SEOs. To further explore the factors contributing to the underperformance of SEO-issuing firms, future research could investigate the specific reasons for their lower returns, analyze the impact of different types of SEOs (e.g., rights issues vs. follow-on public offerings) on long-term performance, and examine the role of market timing and investor sentiment in influencing the performance of SEOs.

Skewness Sentiment and Market Anomalies

This study demonstrates that skewness preference of investors is an important driver of various market anomalies. Using a combined measure of mispricing based on 11 prominent anomaly strategies, we show that return predictability associated with the mispricing component of market anomalies is stronger among firms with higher idiosyncratic skewness. The predictability differences are driven by the higher underperformance of high-skewness firms in short anomaly portfolios. Skewness does not affect the performance of long anomaly portfolios. Portfolio holdings data from a retail brokerage firm show that investors with stronger skewness preferences assign relatively larger weights to stocks in short anomaly portfolios. This paper was accepted by Karl Diether, finance. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4898 .

Does CEO extraversion pay off when in need? Evidence from the global financial crisis

We examine the effect of CEO extraversion on corporate performance during the Global Financial Crisis (GFC). Contrary to the expectation that extraverted CEOs should shield firms better from GFC adversities, we document that the extraversion characteristic of CEOs places a significant, though negative, effect on corporate performance during the financial crisis. Our findings are robust to controlling for other CEO personality traits. We also perform a battery of robustness tests and validate the underperformance of firms with extraverted CEOs during the GFC using stock returns and measures of operating performance. We argue that because extraverted CEOs are associated with heightened firm risk profile, this can hurt firms when the market disciplines excessive risk-taking during the crisis.

The Impact of Industry-Adjusted Profitability and S-Curve Targeted Industry on Capital Structure: Evidence from Thailand

This study examines the impact of industry-adjusted profitability and S-curve targeted industries under an innovation-driven economy on firms’ capital structures in Thailand. The results demonstrate that a superior degree of industry-adjusted profitability reduces the need for debt financing. Within the industry, franchise and harvest firms with sufficient earnings have a lower debt overhang than under-performing firms. Furthermore, the S-curve targeted industries, which typically use debt to finance their expensive investments, appear to use fewer loans when they feel pressured by the investment support policy to intensify research and development (R&D) activities. Overall, in the emerging market geared toward a new economic roadmap, firms’ capital structures are shaped by competitive performance as well as industry and policy forces.

Empowering female entrepreneurs through university affiliation: evidence from Italian academic spinoffs

Abstract Female entrepreneurship, despite increasing attention, is still largely understudied, especially in the academic context. By adopting the lenses of entrepreneurial ecosystems and feminist theories, the paper investigates the firm performance of female entrepreneurs. We provide empirical evidence of the underperformance of women-led firms, being academic spinoffs or not, compared to men-led firms in terms of growth and their overperformance in terms of survival rate. In addition, we focus on differences in the performance of women-led firms only by comparing Italian academic and nonacademic companies. In virtue of their university affiliation, women-led academic spinoffs result to grow more than women-led nonacademic spinoffs and tend to show lower survival rates, which makes them more similar to men-led companies.

Shoot the Arrow, Then Paint the Target: CEO Compensation and Institutional Shareholder Services Benchmarking

AbstractWe document that firms that expect their CEOs’ compensation to exceed the median CEO compensation of their Institutional Shareholder Services (ISS) peers influence ISS to revise these peer sets. Controlling for changes in firm characteristics that ISS uses to select peers, we find that ISS applies an abnormally high turnover rate in the members of these peer sets and increases the representation of focal firms’ chosen peers. This turnover results in increases in the medians of the ISS peers’ CEO compensation and size. We find that these firms underperform and conclude that they attempt to camouflage high CEO pay to mitigate outrage costs.

Invest in Innovation or Not? How Managerial Cognition and Attention Allocation Shape Corporate Responses to Performance Shortfalls

ABSTRACTThis study investigates the influence of managerial cognition and attention allocation on firms’ responses to negative performance feedback. We explore how managerial cognition, as shaped by managers’ experiences, connections, positions, and industry environments, affects underperforming firms’ attention allocation and, consequently, their decisions to invest in innovation. Utilizing a longitudinal sample of Chinese high-tech firms from 2009 to 2017, we find that firms increase investment in research and development (R&D) when performance falls below aspiration levels. We also document that underperforming firms are associated with an even larger R&D investment increase when their CEOs have an R&D or engineering background, serve simultaneously as the board chair, or are not politically connected. In addition, we highlight the moderating effects of industry competition and industry norms on the relationship between firm underperformance and R&D intensity. We conclude that managerial cognition affects firms’ allocation of attention to innovation as a solution for closing performance gaps and shapes corporate responses to negative performance feedback.

Linking ownership acquired in Chinese firms to post-acquisition innovation performance: role of institutional distance

PurposeThe primary purpose of this study is to explore the impact of acquired ownership in Chinese target firm on the innovation performance of developed economies (DE) acquiring firms. Furthermore, the study aims to empirically investigate the moderating influence of institutional distance between two parties’ home countries.Design/methodology/approachFor the empirical investigation of the hypotheses, the authors identified cross-border technological acquisitions from the Securities Data Company between 1995 and 2015. A hierarchical negative binomial regression technique was used to analyze 177 technological acquisitions completed by DE acquiring firms in China.FindingsAnalysis of technological acquisition deals confirmed that acquired ownership undertaken in the Chinese target firms increases the DE acquiring firms’ post-acquisition innovation performance. The authors found that DE acquiring firms underperform in innovation in institutionally distant host countries.Originality/valueThis study contributes to the international business literature by explaining the importance of acquired ownership undertaken in the Chinese target firms for the DE acquiring firm’s innovation performance. Second, institutional theory defines how institutional uncertainty in terms of distance modifies the positive impact of acquired ownership on acquiring firm’s innovation performance.

Corporate environmental responsibility motivated by loss aversion

As societal concerns over environmental protection increase, firms begin to face increasing legal obligations to engage in corporate environmental responsibility (CER). Interestingly, however, some firms go beyond what is legally required and proactively undertake CER practices, leaving scholars to question their motivations. To our best knowledge, the previous literature only offers a dearth of information on the characteristics of proactive CER practices as a risky investment. Thus, in this study, we investigate how organizational risk-taking propensity derived by loss aversion affects corporate motivation to implement proactive CER practices. Using data of firms voluntarily participating in the Green Power Partnership program in the United States, we find that firms performing better than their peers are likely to increase their use of green power. As outperforming firms typically have more to lose than underperforming firms, they become more risk-seeking to avoid future loss of competitive advantage. As a result, they become motivated to more proactively engage in stakeholder management in the form of green energy consumption, even though such proactive CER requires more time and resources. We also find that unrelated and related diversifications have conflicting influences on such a motivation mechanism.

Are bonds blind? Board-CEO social networks and firm risk

We examine the impact of social networks between independent directors and the CEO on firm risk. Employing the deaths and retirements of socially connected independent directors and the passage of the 2002 Sarbanes-Oxley Act for two identifications, we find that board-CEO social networks have a positive impact on firm risk. Specifically, CEOs who are socially connected to their independent directors are motivated to adopt riskier investment, operating and financing strategies. This positive influence is more pronounced for prior under-performing firms and for CEOs with low power or overconfidence, indicating that board-CEO social networks act as career insurance and a power-enhancing mechanism to encourage managerial risk-taking.

Performance Shortfalls and R&D Investment Change: Aspirations, Actions, and Expectations

Built on the Behavioral Theory of the Firm, the paper examines how firm response to performance feedback is influenced by firm expectation on the likelihood of an action to close the performance gap. Using firm level change in R&D intensity as a problemistic search behavior, we explore how performance shortfalls relative to social and historical aspirations may prompt underperforming firms to adjust its R&D investment intensity, and how the magnitude of this adjustment is moderated by firm resources, past experience, industry and market conditions. We conduct our analysis using a longitudinal sample of Chinese firms listed on the ChiNext Board between 2009 and 2017. Our results indicate that underperforming firms increase their R&D intensity to a larger degree than their over-performing peers and periods when these firms have substantial cumulated R&D spending, abundant organizational slack, and are competing in more dynamic industries. We also document that these moderating factors influence relationships between social and historical aspirations and R&D investment decisions in a distinct way. We conclude that firm internal resources, capabilities and external industry and market conditions all affect firm expectations, and consequently shape the direction and magnitude of organizational actions in response to performance aspirations.

Does Maturity Level of Newly Listed Firms Matter in the Long-Run Performance? Evidence from Pakistan

In this study, the sample of newly IPO firms at PSX from 2000 to 2018 is selected to observe the performance in the long run, under different maturity level. The analysis is based on Jensen’s alpha obtained through CAPM, four factors (4-F), and three factors model (3-F). Based on the analysis of Jensen’s alpha, the underpricing of IPOs disappeared after the periods of one to three years to suggest that investors can not earn risk-adjusted positive returns accounting for market, momentum, value and size factors. In the analysis of GCT regression model, for the three different maturity level, the severe underperformance of these new firms are to be observed. Further, the result of new firms through GCT model show that different maturity (1-5 years, 6-10 years, and more than 10 years) of firms do not matter, and overall newly firms underperform in long run.

Hidden Gems: Do Compensation Disclosures Reveal Performance Expectations?

We find that a new compensation disclosure item on expected payouts from performance-based stock grants contains incremental information of a firm’s future performance. Firms that disclose the most optimistic expected payment significantly outperform over the next two years, while the least optimistic firms underperform. Investors and analysts are slow to process the embedded information and are later surprised around earnings announcement days. A portfolio long stocks of the most optimistic firms and short the least optimistic ones earns significant positive post-disclosure abnormal returns. The result is more pronounced when the embedded “soft” information differs from the more visible earnings news.

The leveraged invisible hand: how private equity enhances the market for corporate control and capitalism itself

What keeps corporate managers from underperforming or disregarding shareholders’ interests? In contrast to most scholars and policymakers who believe legal and regulatory oversight is key, Henry Manne’s “Mergers and the Market for Corporate Control” describes a private or entirely invisible hand mechanism for disciplining managers to work for shareholders. The more underperforming firms have depressed stock prices, the more they become targets for buyouts and restructuring with new management. Funding much of these acquisitions is the private equity industry and its use of leveraged buyouts. Such buyouts concentrate ownership in the hands of private equity managers, and the high amount of leverage they use provides strong incentives for private equity managers to implement beneficial reforms. The expansion of private equity has helped to restructure scores of underperforming firms, has benefited equity and debt investors in this alternative investment space, and has enhanced corporate governance in society. This invisible hand mechanism works well and the recent expansion of control over the private equity industry by the securities and exchange industry is unwarranted.

The Leveraged Invisible Hand: How Private Equity Enhances the Market for Corporate Control and Capitalism Itself

What keeps corporate managers from underperforming or disregarding shareholders interests? In contrast to most scholars and policymakers who believe legal and regulatory oversight is key, Henry Manne's Mergers and the Market for Corporate Control describes a private or entirely invisible hand mechanism for disciplining managers to work for shareholders. The more underperforming firms have depressed stock prices, the more they become targets for buyouts and restructuring with new management. Funding much of these acquisitions is the private equity industry and its use of leveraged buyouts. Such buyouts concentrate ownership in the hands of private equity managers, and the high amount of leverage they use provides strong incentives for private equity managers to implement beneficial reforms. The expansion of private equity has helped to restructure scores of underperforming firms, has benefited equity and debt investors in this alternative investment space,and has enhanced corporate governance in society. This invisible hand mechanism works well and the recent expansion of control over the private equity industry by the Securities and Exchange Industry is unwarranted.

Gain or pain? New evidence on mixed syndication between governmental and private venture capital firms in China

I investigate the performance of mixed syndication involving both governmental and private venture capital firms (GVCs and PVCs) in the context of China. Using the data on the investments in start-ups between 1995 and 2011, I find that start-ups backed by mixed syndication in their initial financing round are less likely to survive to the next round to obtain refinancing, compared to those backed by syndication solely among PVCs. I present evidence consistent with two possible explanations of the underperformance of firms backed by mixed syndication: a potentially lower criterion of selecting portfolio companies when led by PVCs and less complementary resources but higher coordination cost in mixed syndication. The empirical results continue to hold when using instrumental variables, propensity score matching analysis and the quasi-maximum likelihood estimation method for mitigating the potential selection bias and endogeneity problems.

Equities issues and long-term firm's performances in Tunisian stock market

This paper investigates the long-run performance of seasoned equity offering (SEO) firms in Tunisia. We use event time and calendar time approach to measure the long-run performance of SEO firms. The results suggest that SEO firms underperform in the long-run, and this underperformance is robust according to alternative measures. In the cross-section, we show that the runup, market runup and the proceeds from SEO are significant determinants of the underperformance of SEO firms. These results are in accordance with both behavioural theories and real options theory. To distinguish between these two theories, we analyse the average systematic risk dynamics around SEO. The results suggest that there is an increase in risk before the offering, and a significant decrease of risk after the offering. The behaviour of risk around SEO appears consistent with real options predictions.

Equities issues and long-term firm's performances in Tunisian stock market

This paper investigates the long-run performance of seasoned equity offering (SEO) firms in Tunisia. We use event time and calendar time approach to measure the long-run performance of SEO firms. The results suggest that SEO firms underperform in the long-run, and this underperformance is robust according to alternative measures. In the cross-section, we show that the runup, market runup and the proceeds from SEO are significant determinants of the underperformance of SEO firms. These results are in accordance with both behavioural theories and real options theory. To distinguish between these two theories, we analyse the average systematic risk dynamics around SEO. The results suggest that there is an increase in risk before the offering, and a significant decrease of risk after the offering. The behaviour of risk around SEO appears consistent with real options predictions.

Analysis of Merger and Acquisition in Pakistan

We examine the financial performance of firms in the post-Merger and acquisition period for firms listed on the Karachi Stock Exchange by exploring various motives of merger and acquisitions offered by theoretical and empirical literature. Specifically, we explore these motives in the context of the theory of synergy, agency theory and behavioral finance perspectives. Empirical results for agency theory shows the presence of empire building motives that lead to the underperformance of firms in post-merger and acquisition period. The study finds no support for managerial risk aversion hypothesis of agency theory in Pakistani market. Empirical results do not find any evidence to support the presence of managerial hubris or overconfidence proposition but we do find evidence in support of the escalation of commitment hypotheses and its impact on post-merger and acquisition performance.