Unrelated Business Research Articles

Table of Contents

AbstractIRS is Focusing on Political Contributions Gift Tax IssueRepublican Senators Request Information From IRS on Gift Tax IssueSenators Express Concerns About Proposed Executive OrderCourt of Appeals Holds Foundation is Not a Supporting OrganizationIRS Issues Guidance As to Deductibility of Booster Club DuesExemption Denied to Military Students Housing OrganizationOrganization's Status as Exempt Labor Organization RevokedForeclosure‐Related Services Organization Fails to Achieve ExemptionIRS Updates Unrelated Business StatisticsIRS Updates Statistics on Noncash Charitable ContributionsIRS Updates Statistics on Split‐Interest Trust FilingsIRS Updates Statistics on Private FoundationsMajor Gift Opportunities and Techniques: A SeriesParade of Other Recent Private Letter RulingsOther Developments

How to Evaluate NCAA Success in Attaining its Stated Mission. Implications for Athletes’ Rights and Social Justice

Most major organizations have mission statements that define their purpose or reason for existing. A mission statement is meaningful only if it acts as a unifying force for guiding strategic decision making and achieving long term goals. Well defined mission statements also serve as a yardstick for measuring organizational effectiveness in attaining stated goals. With this is mind, the purpose of this paper is to discuss methods that can be used to determine whether the NCAA is achieving its educational goals or merely using its mission statement as support for an “unrelated business.” Differences between Federal Graduation Rates, Graduation Success Rates, and the Academic Progress Rate are examined. Implications of the NCAA’s statement of purpose for social justice and athletes’ rights are also discussed.

The valuation effects of equity carve-outs

In an examination of 136 equity carve-outs in Taiwan in 1994–2007 we first find significantly positive stock price reactions associated with the announcements, consistent with the global findings. We further examine the sources of wealth gains on the basis of the asymmetric information hypothesis (Nanda, 1991) and the divestiture gains hypothesis (Schipper and Smith, 1986) and find that the results lend more support to the latter than the former. Specifically, two ramifications of the divestiture gains hypothesis are supported: firms that divest unrelated business (refocusing strategy hypothesis) and use the proceeds to undertake new investments (the investment strategy hypothesis) draw favourable market appraisals.

Effect of diversification on firm performance: Application of the entropy measure

This study investigated the effects of diversification on firm performance in the restaurant industry. In prior studies, the theoretical rationales and empirical results appeared to contradict each other. These contradictory results may be due to factors such as industry-specific characteristics or a linear understanding of the relationship between diversification strategies and firm performance. Thus, this study suggested a non-linear hypothesis based on the costs and benefits of diversification strategies with businesses categorized based on their level of diversification. The results of this study showed that restaurant firms do not benefit from a low level of related diversification. This study also found that when restaurant firms are involved in both related and unrelated businesses, the optimal mixed ratio of diversification is approximately half and half. More detailed results, as well as academic and practical implications, are discussed in this paper.

Growing Out of Trouble? Corporate Responses to Liability Risk

This paper analyzes corporate responses to the risk of large, adverse shocks. In particular, we study how a typical firm responds to an exogenous increase in liability risk arising from its workers’ exposure to newly identified carcinogens. We find that firms, particularly those with weak balance sheets, tend to respond to such risks by undertaking aggressive growth through the acquisition of large, unrelated businesses with relatively high operating cash flows. By diversifying the firms’ operations, the growth likely reduces expected costs of financial distress for shareholders, but also may be motivated by managers’ personal exposure to their firms’ risk. Consistent with an agency conflict driving some of this growth, the acquisitions are associated with negative abnormal returns and the extent of growth is related to firms’ external governance, managerial stockholdings, and institutional ownership. The results suggest that the risk of large, adverse shocks can have a substantial impact on firms’ financing and investment decisions, and that corporate governance can be particularly important when firms encounter a negative shock.

CORPORATE PORTFOLIO MANAGEMENT APPLICATIONS: ROLE OF FIRM ATTRIBUTES & IMPACT ON CORPORATE PROCESSES

Corporate Portfolio Management (CPM) approaches emerged more than forty years ago in response to the rise of large corporations with diversified portfolios of partly unrelated business units. The initial purpose and main application area of CPM was to support corporate management in the definition of the boundaries of a firm, the allocation of resources and the assignment of specific roles and targets for each business unit. Today, CPM is still regarded as a highly relevant aspect of strategic management in the corporate landscape, but little is known about the application of CPM instruments in corporate practice. Based on a global survey among 196 senior executives of the largest companies worldwide, we identified three distinct types of CPM users: Corporate Developers, Business Unit Steerers and Passive Portfolio Managers. These different patterns of CPM application can be traced back to a set of company characteristics which include the underlying market structure, portfolio structure and portfolio siz...

Table of Contents

AbstractIRS Reviews, Seeks Comments On New Hospital Exemption RulesHouse Passes Campaign Finance Disclosure LegislationFraternity Chapter Scholarship Foundation Denied ExemptionOrphanage Held Agency of Church for Parsonage Allowance PurposesIRS Rules that Unrelated Businesses Not Regularly Carried OnA Look at the Most Recent Reasonable Compensation CaseIRS Overstates its Cases: A RepriseSweeping Public Charity Legislation IntroducedCharitable Giving Decreased in 2009New Statistics on Noncash Charitable ContributionsOther Developments

RELATEDNESS AND MARKET EXIT.

Academy of Management Annual Meeting Proceedings includes abstracts of all papers and symposia presented at the annual conference, plus 6-page abridged versions of the “Best Papers” accepted for inclusion in the program (approximately 10%). Papers published in the Proceedings are abridged because presenting papers at their full length could preclude subsequent journal publication. Please contact the author(s) directly for the full papers. ArticlesRELATEDNESS AND MARKET EXIT.GWENDOLYN K. LEE, TIMOTHY B. FOLTA and MARVIN B. LIEBERMANGWENDOLYN K. LEE, TIMOTHY B. FOLTA and MARVIN B. LIEBERMANPublished Online:30 Nov 2017https://doi.org/10.5465/ambpp.2010.54493686AboutSectionsPDF/EPUB ToolsDownload CitationsAdd to favoritesTrack Citations ShareShare onFacebookTwitterLinkedInRedditEmail AbstractResearchers in corporate strategy have long argued that resource "relatedness" contributes to a firm's competitive advantage. One implication is that entries made by a firm into businesses that are closely related to the firm's existing businesses should have higher survival rates than entries by the firm into unrelated businesses. In contrast to this traditional view, we offer a distinct perspective in which relatedness increases a firm's likelihood of abandoning new businesses. Using a sample of more than 1,200 market entries in the U.S. telecommunications sector during 1989-2003, we show that the rate of market exit increased with the relatedness of the new business to the firm's existing businesses.FiguresReferencesRelatedDetails Vol. 2010, No. 1 Permissions Metrics in the past 12 months History Published online 30 November 2017 Published in print 1 August 2010 InformationCopyright of Academy of Management Journal is the property of Academy of Management and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder’s express written permission. However, users may print, download, or email articles for individual use.KeywordsMARKET exitMARKETING strategyCOMPETITIVE advantageTELECOMMUNICATION -- United StatesNEW business enterprisesDownload PDF

Ownership structure, corporate diversification and capital structure

PurposeThe purpose of this paper is to investigate whether, and to what extent, corporate diversification into related and unrelated businesses affects capital structure choices, and whether ownership structure is germane to the understanding of corporate diversification strategies and debt‐equity financing choices.Design/methodology/approachUnivariate approaches include the parametric two‐sample t‐test, non‐parametric Kolmogorov‐Smirnov test and Kruskal‐Wallis rank test, and cluster analysis. Multivariate approaches include panel data regressions to identify the sign and magnitude of the effect of diversification on capital structure, after controlling for a number of industry and firm characteristics as suggested in the literature.FindingsCorporate diversification into related or unrelated industries has opposite effects on capital structure, after controlling for ownership structure and corporate governance mechanisms. Consistent with the prediction of organizational economics, an increase in the degree of business relatedness is associated with a reduction in debt while an increase in business unrelatedness is associated with an increase in debt. In addition, there is strong evidence that government‐controlled firms use less debt financing and that government ownership weakens the positive relationship between unrelated diversification and leverage. The results are robust to different measures of capital structure.Originality/valueTraditional finance literature has not been able to provide conclusive evidence on what affects corporate capital structure decisions. This paper shows that a corporate strategy perspective, with its emphasis on a managerial decision‐making process, can provide a behavioral basis for understanding capital structure choices.

Relatedness and Market Exit

Researchers in corporate strategy have long argued that resource contributes to a firm’s competitive advantage. One implication is that entries made by a firm into businesses that are closely related to the firm’s existing businesses should have higher survival rates than entries by the firm into unrelated businesses. In contrast to this traditional view, we offer a distinct perspective in which relatedness increases a firm’s likelihood of abandoning new businesses. Using a sample of more than 1,200 market entries in the U.S. telecommunications sector during 1989-2003, we show that the rate of market exit increased with the relatedness of the new business to the firm’s existing businesses.

Commercialized Intercollegiate Athletics: A Proposal for Targeted Reform Consistent with American Cultural Forces and Marketplace Realities

This article observes that American society’s passion for intercollegiate sports competition is an extremely powerful, naturally evolved cultural force. The marketplace responds to cultural forces, and the commercialization of college sports directly reflects the marketplace realities of our society. For example, colleges and universities rationally use their intercollegiate athletic programs, particularly NCAA Division 1 FBS football and basketball, as a means to achieve a wide range of legitimate objectives of higher education. Thus, the authors advocate that university athletic department revenues should continue to be exempt from federal taxation, specifically the unrelated business income tax (UBIT), despite the increasingly commercialized nature of intercollegiate sports. However, the commercialization of intercollegiate athletics creates the potential for conflict with a university’s academic mission and the risk that student-athletes may be exploited. The authors propose that Congress provide the NCAA and its member universities with a limited exemption from the federal antitrust laws conditioned upon targeted reforms that will 1) ensure that intercollegiate athletics are primarily an educational endeavor; 2) better enable student-athletes in revenue-generating sports to obtain the benefit of their bargain; and 3) protect and maintain student-athletes’ intercollegiate athletics participation opportunities in nonrevenue generating sports.

Risky Ventures: The Impact of IRS Health Care Joint Venture Policy

IRS oversight of joint ventures between exempt and for-profit organizations has undergone substantial change over the past thirty years. This change has important consequences for the health care industry, where joint ventures have grown increasingly common. In the face of unclear guidance and aggressive enforcement of exemption-policing tools such as the private benefit doctrine and the control test, a hospital risks revocation of its tax-exempt status, or liability for unrelated business income tax, when it engages in a joint venture directly. It may be able to eliminate this risk by operating the same joint venture through a for-profit subsidiary; however, such a structure may be less constrained to serve a charitable mission. Thus, the Service's approach to policing tax-exempt status creates incentives to structure joint ventures in a way that may ultimately reduce charitable care. This Note argues that such incentives are undesirable and avoidable, and proposes several reforms that would help to eliminate them.

Family Firms, Agency Costs and Risk Aversion - Empirical Evidence from Diversification and Hedging Decisions

We analyse whether family firms differ from non-family firms in terms of business segment and geographical diversification or the application of currency hedging instruments. This analysis is based on a unique dataset of 339 publicly listed companies (1,561 firm years) in the German Prime Standard from 2002 to 2006. While there is widespread empirical evidence on differences between family and non-family firms in terms of corporate performance, comparatively little is known about the impact of family firm dimensions on firm behaviour. We try to fill this research gap with a single country study focusing on Germany, an economy where family-control traditionally plays a predominant role in corporate governance. We find that family firms are less diversified in unrelated business segments. However, there are no differences between family firms and non-family firms in terms of overall and related business segment diversification. For geographical diversification, we do not find convincing evidence for any differences. Finally, our analysis indicates that family firms are less likely to use currency hedging instruments. In a second step, we go beyond existing research and distinguish between two separate dimensions of family firms: family management and family ownership. Empirical results indicate that those two dimensions have conflictive effects on firm behaviour. Family management, i.e. the involvement of the founding family into firm management, reduces agency costs and thus leads to lower levels of business segment diversification and less currency hedging. In contrast family ownership leads to risk aversion and more business segment diversification. Overall, the family management aspect is more likely to dominate the family ownership aspect.

Institutional Logics or Agency Costs: The Influence of Corporate Governance Models on Business Group Restructuring in Emerging Economies

Business groups, the leading economic players in emerging economies, have responded to the market-oriented transition primarily through corporate restructuring. Agency theory predicts that acquisition and divestiture would serve the interests of dominant families and foreign investors in different ways. Further, dominant families, foreign investors from shareholder-based countries, and foreign investors from stakeholder-based countries each operate under distinct institutional logics of appropriate restructuring strategies. We test hypotheses about agency and institutional mechanisms using large business groups in Taiwan between 1986 and 1998 as our empirical example. We find that, consistent with both mechanisms, family-controlled business groups are less likely to divest of unrelated businesses. However, the institutional logics mechanism can better explain the relative lack of unrelated acquisition in family-controlled groups and the difference in divestiture between groups with more shareholder-based foreign investment and those with more stakeholder-based investment. Our study contributes to the neo-institutional perspective of corporate restructuring and strategic management in general by empirically separating the two mechanisms and examining organizational responses to conflicting institutional logics. Our study also adds to the understanding of business group restructuring in emerging economies.

Why Do Nonprofits Have Taxable Subsidiaries?

Nonprofit organizations operate taxable activities in two general ways: as unrelated businesses operated by the nonprofit or through controlled subsidiaries. Prior research and regulatory attention has focused on unrelated business activities, although taxable subsidiaries generate at least as much taxable revenue. We find that nonprofits place their taxable activities into subsidiaries when those taxable activities are relatively large, and when the taxable activities are relatively more risky. Nonprofits trade off possible benefits of the subsidiary form with the costs of reduced tax planning ability.

Behavior of Nonprofit Organizations in For-Profit Markets: The Curious Case of Unprofitable Revenue-Raising Activities

When nonprofit organizations in the U.S. engage in activities that are substantially related to their legal mission they pay no profits taxation, but profit from unrelated business (UB) activities is taxed. Since UB activity has no apparent justification other than to generate revenue, we attempt to explain why no profit is so frequently reported. We examine the accounting allocation of joint costs, such as depreciation, between the taxed and untaxed activities in six industries - including health, education, and the arts - and also the specific kinds of UB activities undertaken. We find evidence that the reported unprofitability of UB activity masks true profitability.

Restructuring through spin‐off or sell‐off: transforming information asymmetries into financial gain

AbstractThe authors examine how managers select between corporate restructuring implementation alternatives and how those decisions influence the profitability of the restructuring event. They argue that managers and owners have information asymmetries with respect to the assets in the restructuring and the restructured firms' diversification strategy, and that managers select between two popular implementation alternatives, spin‐offs and sell‐offs, to convert knowledge differences into financial gain. When the restructured assets reside in primary and related business lines or the firm has low and related diversification among its business lines, the restructuring is difficult for observers to assess and understand. Spin‐offs most effectively and profitably reduce information asymmetries by transferring assets to the capital market and increasing the efficiency and transparency of the restructuring firm. Conversely, when the restructured assets reside in secondary and unrelated business lines or the firm has high diversification, sell‐offs best mitigate asymmetries by using market forces to reallocate assets to their most productive uses while improving the strategy and performance of the restructuring firm. Tests of a sample of 204 restructuring events support the hypotheses. Overall, the findings suggest that the influence of corporate restructuring on financial performance is determined in part through how the restructuring is implemented. Copyright © 2007 John Wiley & Sons, Ltd.

Why Are Nonprofits Exempt From the Corporate Income Tax?

This article considers the nonprofit exemption from the corporate income tax (CIT), which has typically been justified with either subsidy or base-defining reasons. A different rationale is introduced: The corporate tax as applied to for-profit businesses is meant to capture in the tax base income ultimately owned by individuals that might otherwise escape tax, and the nonprofit exemption is a consequence of nonprofit income`s not being attributable to any individual. To explain why nonprofits are exempt from the CIT, scholars should begin by asking why there is a CIT at all rather than by asking what is so special about nonprofits. The argument is then applied to the debate over the rationale for the unrelated business income tax.

Diversification of Korean housebuilding firms: The pattern and motives between 1980 and 1995

The Korean housebuilding industry made rapid growth during the 1980s and 1990s and the industry has been restructured. One of its outstanding characteristics has been the diversification of housebuilding firms. The objective of this paper is to examine the impact of government regulations on the restructuring of the Korean housebuilding industry. The extent and pattern of diversification were examined via an analysis of the period 1980–1995, and the motives for diversification were investigated using interviews and empirical modelling. The results show that Korean housebuilding firms were diversified into both related and unrelated businesses during the rapid growth period. The conclusion is that building firms tended to diversify into other businesses in order to use resources more efficiently. In particular they extended their activities into counter-cyclical businesses in order to compensate for business loss due to tight government regulation. The diversification is seen as a survival strategy under a regulated environment as well as a long-term growth strategy.

Multinational corporation internationalization in the service sector: a study of Japanese trading companies

This paper extends Chang's (1995) sequential investment theory to include multinational corporations (MNCs) in service industries, given this sector's large and growing impact on the global economy. To facilitate an examination of service MNC internationalization patterns, we develop a new typology of service investment (i.e., core-global, related-local, unrelated-global, and unrelated-local) based on business relatedness and location-specificity. We test this typology on a sample of large Japanese trading companies; our results suggest that the initial investments of service MNCs are closely related to their core businesses and are less location-specific, but that subsequent investments are less related to firms' core services and are more location-specific – a pattern similar to the traditional view on manufacturing MNCs. We extend our analysis to examine several case studies to provide a richer context for these findings. In addition, we examine the performance implications of internationalization. Our findings suggest that firms that internationalize through early investments that are closely related to their core activities outperform those in unrelated businesses over time, but that this performance gap between related and unrelated foreign investments diminishes in more advanced stages of internationalization.