Underperformance Of Firms Research Articles

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 1999 and 2011, I find that start-ups backed by mixed syndication in their initial financing round are less likely to receive refinancing, compared to those backed by syndication solely among PVCs. I present evidence consistent with two possible mechanisms in explaining the underperformance of firms backed by mixed syndication: a potentially lower quality of portfolio companies due to the distorted risk premium, and less complementary resources but higher coordination cost in mixed syndication. The empirical results continue to hold when I use instrument variable method, propensity score matching analysis, Heckman treatment method, and endogenous switching regressions in mitigating the potential selection bias and endogeneity problems.

Polarisation and Reversion under Competition: Profitability of Indian Firms

We analyse profitability dynamics in a large emerging economy, India, over the two-and-a-half decades since economic liberalisation began in earnest. We find that the average rate at which Indian firms reverted to normal profitability increased significantly, particularly for firms earning supernormal profits. In contrast, firms earning below-normal profitability have been marked by little reversion to normal. Inducing underperforming firms to improve their profitability is of great policy importance. The pattern in profitability dynamics of Indian firms in the early years was consistent with a polarised long-run profitability distribution. The polarisation tendency was reversed in later years, but the projected long-run profitability distribution has a substantial underperforming tail.

The impact of hedge fund activism on target firm performance, executive compensation and executive wealth

This paper examines the relationship between hedge fund activism and target firm performance, executive compensation, and executive wealth. It introduces a theoretical framework that describes the activism process as a sequence of discrete decisions. The methodology uses regression analysis on a matched sample based on firm size, industry, and market-to-book ratio. All regressions control for industry and year fixed effects. Schedule 13D Securities and Exchange Commission (SEC) filings are the source for the statistical sample of hedge fund target firms. I supplement that data with target firm financial, operating, and share price information from the CRSP-COMPUSTAT merged database. Activist hedge funds target undervalued or underperforming firms with high profitability and cash flows. They do not avoid firms with powerful CEOs. Leverage, executive compensation, pay for performance and CEO turnover increase at target firms after the arrival of the activist hedge fund. Target firm executives’ wealth is more sensitive to changes in share price after hedge fund activism events suggesting that the executive team experiences changes to their compensation structure that provides incentive to take action to improve returns to shareholders. The top executives reap rewards for increasing firm value but not for increased risk taking.

Family control and corporate social responsibility

Abstract We investigate the impact of family control on corporate social responsibility (CSR) performance. Using newly collected data on the ultimate ownership structure of publicly traded firms in nine East Asian economies, we find that family-controlled firms exhibit lower CSR performance, consistent with the expropriation hypothesis of family control. The negative relationship between family control and CSR is robust to alternative measures of family control, different components of CSR, as well as to endogeneity tests, subsample tests, and alternative estimation methods. We further find that CSR underperformance concentrates in family firms with greater agency problems and in countries with weaker institutions. Moreover, the underperformance of East Asian family firms holds when controlling for the effects of other large shareholders and when comparing with family firms from other countries. These findings contribute to understanding the determinants of CSR and highlight the importance of corporate governance and the institutional environment in improving CSR performance of family-controlled firms.

Technological relatedness and asymmetrical firm productivity gains under market reforms in China

This article employs fixed effect quantile regression techniques to study the effects of technological relatedness on firm productivity and to investigate whether the size of those effects varies for low and high performing firms. Next, we consider how changes in the local industrial mix brought about by China’s market reforms influence the ability of different types of firms to benefit from technological-related spillovers. The findings highlight the important role that technological relatedness has on increasing firm productivity, providing some support for the idea that regions should pursue a strategy of ‘regional branching’ to evolve the local industrial mix into related economic activities. The findings also reveal, however, that increasing technological relatedness may asymmetrically harm underperforming firms and widen disparities in productivity between local firms.

Performance of shariah-compliant firms and non-shariah-compliant firms in the MENA region

Purpose This paper aims to document the relative performance of non-financial shariah-compliant firms and non-financial non-shariah-compliant firms in the MENA (Morocco, Egypt, Saudi Arabia, United Arab Emirates, Jordan, Kuwait and Bahrain) region during the period between 2005 and 2009. Design/methodology/approach This paper uses pooled ordinary least squares regression analysis to document the effect of shariah compliance on stock price performance in the MENA region on a sample of non-financial firms that consists of shariah- and non-shariah-compliant firms. Findings Using market-adjusted returns as a proxy for performance, this paper shows that shariah-compliant firms underperform non-shariah-compliant firms. The results also show that underperformance of shariah-compliant firms holds in the civil law and in the common law countries. Interestingly, this paper also shows that difference between the performance of shariah-and non-shariah-compliant firms disappears during the crisis period. Research limitations/implications This paper argues that the characteristics of shariah-compliant firms are such that these firms are at a disadvantage relative to their non-shariah-compliant counterparts. For example, high leverage of their counterpart firms can act as a disciplining mechanism and positively affect performance of these firms. Similarly, high account receivables and high cash allow non-shariah-compliant firms to make more effective business networks than shariah-compliant firms and fund large capital expenditures. Consequently, shariah-compliant firms underperform non-shariah-compliant firms. This study’s results, however, should be read with caution, as they are mainly based upon the performance of large volume, statistical significance, sampling errors and possible labeling miss-specification. Further research on this topic with different research methodology is essential. Originality/value This paper takes a financial view rather than religious view while highlighting the impact of shariah characteristics on firm performance.

Revisiting Post-Downgrade Stock Underperformance

Prior research documents significant negative long-term stock returns following bond-rating downgrades. Some downgraded firms are placed on credit watches before downgrades, and we find that the post-downgrade stock underperformance of such firms is significantly reduced. We explore two explanations for the difference in post-downgrade stock performance that are not mutually exclusive: (a) a credit watch placement provides an early signal of the subsequent rating downgrade and gives investors more time to better understand the information content of the downgrade (the early-disclosure effect), and (b) a credit watch placement induces better recovery from credit deterioration for the downgraded firm in the long run (the recovery effect). We find that firms receiving watch-preceded downgrades show better improvements in operating profitability, financial leverage, and overall default risk, and are less likely to be further downgraded in future periods, compared with firms that are directly downgraded. Our findings suggest that the recovery effect is important in explaining downgraded firms’ performance in the long run and provide new evidence in support of the premise in the recent literature that credit watches can induce on-watch firms’ efforts to restore deteriorated credit quality.

Which institutional investors matter for firm survival and performance?

Using data that spans three decades, we assess the diverse roles of institutional investors in impacting survival and performance of chronically underperforming firms and contrast the results for consistently overperforming firms. We find material differences in investor roles and investment returns between these samples. Differentiating among institutional types, controlling for prior performance and attrition bias provides insights unattainable by examining aggregated holdings. For underperformers, results are negative for activist pension funds and long-term institutions, positive for activist hedge funds and short-term institutions, and mixed for institutional blockholders.

The Long-Term Performance Effect of Credit Watches on Downgraded Firms

Prior research documents significant negative long-term stock returns following bond-rating downgrades. Some downgraded firms are placed on credit watches before downgrades, and we find that the post-downgrade stock underperformance of such firms is significantly reduced. We explore two explanations for the difference in post-downgrade stock performance that are not mutually exclusive: 1) a credit watch placement provides an early signal of the subsequent rating downgrade and gives investors more time to better understand the information content of the downgrade (the early-disclosure effect), and 2) a credit watch placement induces better recovery from credit deterioration for the downgraded firm in the long run (the recovery effect). We find that firms receiving watch-preceded downgrades show better improvements in operating profitability, financial leverage, and overall default risk, and are less likely to be further downgraded in future periods, compared with firms that are directly downgraded. Our findings suggest that the recovery effect is important in explaining downgraded firms’ performance in the long run and provide new evidence in support of the premise in the recent literature that credit watches can induce on-watch firms’ efforts to restore deteriorated credit quality.

Family Control and Corporate Social Responsibility

We investigate the impact of family control on corporate social responsibility (CSR) performance. Using newly collected data on the ultimate ownership structure of publicly traded firms in nine East Asian economies, we find that family-controlled firms exhibit lower CSR performance, consistent with the expropriation hypothesis of family control. The negative relationship between family control and CSR is robust to alternative measures of family control, different components of CSR, as well as to endogeneity tests, subsample tests, and alternative estimation methods. We further find that CSR underperformance concentrates in family firms with greater agency problems and in countries with weaker institutions. Moreover, the underperformance of East Asian family firms holds when controlling for the effects of other large shareholders and when comparing with family firms from other countries. These findings contribute to understanding the determinants of CSR and highlight the importance of corporate governance and the institutional environment in improving CSR performance of family-controlled firms.

Dissecting the Asset Growth Anomaly

Studies have shown that firm asset growth predicts cross-sectional stock returns. Firms that shrink their assets earn superior returns while firms that substantially expand their assets incur poor returns in the following years. I show that the negative asset growth often implies poor operating performance and a high probability subsequently to be delisted from the exchanges and that the high asset growth is primarily fuelled by large external financing. The seemingly superior returns of the negative asset growth portfolios are due to the omission of delisting returns. The poor returns of the high asset growth portfolios coincide with the widely-documented return underperformance of firms that have resorted to debt or equity offerings. Controlling for the delisting bias and the underperformance following large external financing, I do not find an independent effect of asset growth on stock returns.

Female CEOs, Firm Performance, and Firm Development: Evidence from Thai Manufacturers

Even though there are a number of previous studies investigating the underperformance of female-led firms as compared to male-led ones, none have investigated the impact of women as heads of firms in terms of short-term performance (sales and profit) and long-term development (innovation and training). Using 1,043 manufacturing firms in Thailand as a case study of a developing country in which the proportion of women chief executive officers (CEOs) is the highest among the Southeast Asian countries, this article investigates the impact of female CEOs on both short-term performance and long-term firm development. Even though the number of women in the manufacturing sector is limited, women CEOs of Thai manufacturing companies are found to have a negative effect on both short-term financial performance indicators, including the annual sales and profits, as well as long-term development of firm indicators (product innovation, process innovation, and provision of employee training). However, this negative association of short-term financial performance is weaker in the case of women CEOs who have completed college. In addition, more experienced women CEOs are more likely to provide employee training. Promoting highly educated and experienced women in management positions as well as providing them with training should be a priority in order to enhance the short-term and long-term performances of their companies.

Corporate Ownership, Corporate Control and Corporate Performance in Sub-Saharan African: Evidence from Nigeria

This paper investigates the relation between corporate ownership and corporate performance of listed companies in Nigeria, a foremost Sub-Saharan African country during the period 2002-2007. The data is obtained from the firms’ annual reports and accounts and the Nigerian Stock Exchange daily performance reports. The combination of 70 firms and six-year period studied provides a balanced panel with 420 observations for panel data analysis. The results from the ordinary least square (OLS) regression analyses show that there is a strong connection between foreign ownership structure and firm performance. Foreign ownership structure is found to exhibit significant improvements in firm performance; it adumbrates eclectic competitive advantages in ownership, control and internalization respects over other types of ownership structure. We find no statistically significant relation between concentrated ownership and firm performance. Insider or managerial ownership, however, exhibits significant decline in firm performance. These findings are consistent with the view that firm performance is a negative predictor of insider ownership. We also find support for the notion that management is apathetic to holding equity stakes in their underperforming firms.

Liquidity, delistings, and credit risk premium

Our study analyzes in detail the results of the credit risk effect by using data from the unique rating environment of Taiwanese stock markets. Even in distinct institutional settings, our empirical results reaffirm the well-known inverse relationship of returns and credit risk, which is robust with regard to cross-sectional and time-series scrutiny. We reveal that the underperformance of low-rated firms around their rating downgrades, when they are subject to both severe illiquidity and short-sale constraints, partially explains the abnormal returns of long–short portfolios, although the returns remain substantial when data associated with downgrades is removed. When targeting delisted firms, we observe that delistings among the lowest-rated firms exhibit extremely poor returns near the time of their downgrades. We find that the abnormal returns become insignificant in the long–short portfolio in the sample, from which delistings are excluded. Our empirical evidence suggests that market mispricing of delisted stocks near the time of their downgrades is a primary cause of the credit risk puzzle.

Book Reviews

Book Reviews

Underperformance of founder-led firms: An examination of compensation contracting theories during the executive stock options backdating scandal

Using the executive stock option (ESO) backdating scandal as a backdrop, this paper examines whether compensation committees can effectively set executive compensation contracts in the presence of a founding CEO. Analyzing a sample of firms accused of backdating ESO grant dates and a control sample of non-backdating firms, we find evidence suggesting that managerial power influences the decision to backdate. Specifically, our analysis indicates the presence of a founder CEO increases the likelihood that ESOs are backdated by 22%. We further find that founder-led firms strongly underperform a matched sample of non-backdating firms. This finding contrasts a number of studies that document superior operating and stock return performance for founder-led firms.

Gender differences in business success of German start-up firms

Many studies found that women-owned firms underperform when comparing performance indicators at an aggregate level. The performance gap might be attributed to gender differences in personal and firm characteristics affecting performance. However, previous studies were not able to entirely explain female underperformance in this way. There are two theoretical perspectives on the causes of female underperformance. Liberal feminist theory suggests that women lack access to relevant resources like education and business experience or financial capital. Social feminist theory suggests that women have different attitudes and values and, consequently, adopt a different approach to business. This paper shall contribute to a better understanding of the causes of female underperformance using performance indicators related to size, growth and profitability. We analyze whether gender differences in observable characteristics like education, experience, team size, entrepreneurial motivation and industry choice explain differences in performance and how large the impact is. We use data from the KfW/ZEW Start-Up Panel and track the performance of about 4,700 German start-up firms over up to four years after foundation. Sales, two measures of employment growth, and return on sales are used as performance indicators. We find that female-founded firms perform worse for all indicators. At the same time, there are significant gender differences in many of the characteristics observed. Compared to male entrepreneurs, female entrepreneurs have a lower level of formal education, less professional experience, are part of smaller start-up teams, are more often driven by necessity, and are overrepresented in the retail and service industries and in lower-tech industries in general. These differences can explain parts of female entrepreneurial underperformance, but their contribution to the performance gap depends largely on the performance indicator considered. Our results do not provide clear evidence for either liberal or social feminist theory. As to liberal feminist theory, we find that gender differences in founders’ resources (human capital, business partners) partly explain the performance gaps in growth and sales. But there is also evidence that the profitability gap becomes even larger when accounting for gender differences in specific resources like the number of team partners and entrepreneurial experience. As to social feminist theory, the gap in profitability itself speaks against the theory’s implication that female entrepreneurs are as efficient managers as male entrepreneurs. We do not find evidence for gender differences in profit orientation but find that female entrepreneurs are less growth-oriented. Unfortunately, we lack information on the time resources available to male and female entrepreneurs. Thus we are unable to test the hypothesis that female entrepreneurs underperform because they are more strained by domestic responsibilities. Moreover, we lack information on personal traits like risk attitude and self-efficacy which may also affect entrepreneurial performance.

Which Institutional Investors Matter for Firm Survival and Performance?

We assess the diverse roles of institutional investors in impacting survival and performance of chronically underperforming firms and contrast the results for consistently overperforming firms. We find material differences in institutional investor roles between these two samples. Differentiating among institutional types, using common evaluation criteria, and controlling for prior performance and attrition bias provides insights unattainable by examining aggregated holdings or holdings of a single type. For underperformers, results are negative for activist pension funds and long-term institutions, positive for activist hedge funds and short-term institutions, and mixed for institutional blockholders. Differences between independent and gray institutions are not material.

The Mystery of the Market for Corporate Control: Takeover Likelihood of Underperforming Firms

This study examined the relationship between underperformance and takeover likelihood using stock-market and accounting-based financial measurements from companies in the UK, US and Canada over a period of 17 years (1988-2004), applying hierarchical binary logistic regression analysis. Despite the general wisdom in the financial literature that the external markets for corporate control are said to work actively as a disciplinary device through takeovers in Anglo-Saxon economies, our study could not confirm these outcomes statistically. This research detected no significant association between takeover likelihood and firm performance, implying that the disciplinary effect of takeovers is statistically non-existent.

Cherry Picking in Cross-Border Acquisitions

This paper attempts to explain the tendency of foreign acquirers to choose better performing firms in emerging markets, which limits underperforming firms’ access to foreign capital. Using a simple law and finance model, we offer an explanation based on emerging countries’ weaker investor protection (IP) compared to acquirers’ home countries, predicting a positive relation between the gap in the strength of IP (between acquiring and target countries) and the intensity to cherry pick. To test this prediction, we identify among our sample countries 20 economies that enacted major corporate governance reforms (CGRs). These CGRs change the gap in IP between an acquirer and a target country in a staggered fashion, enabling us to estimate differences-in-differences. Estimation results reveal that cherry picking moderates after a target country undertakes a CGR, which narrows the IP gap. Conversely, cherry picking intensifies after an acquirer’s home country enacts a CGR, which enlarges the IP gap. These results imply emerging economies must strengthen investor protection if they want to increase underperforming firms’ access to foreign capital.